Taxes are a charge that the government levies on the money you make. When you earn a salary from a job, an income from a business, or other similar sources of money, the government charges income tax on it. However, your income is not the only source of revenue for you. You can also earn money through your investments. These earnings are known as your profits or gains. Your gains from capital investments are categorized under two heads – long-term capital gains and short-term capital gains. These are charged differently depending on the term of your investment.
The capital gains tax rate on both short and long-term investments may differ for each year. It is fixed by the Internal Revenue Services (IRS) and is adjusted as per the rate of inflation in the country. So, the capital gains tax rate for the 2021 tax year may not be the same as the capital gains tax rate for the 2020 or 2022 tax year. For this purpose, it becomes very important to plan your taxes in advance and be aware of the latest tax slabs. This will help you plan your withdrawals and redemptions and lower your tax liabilities for a given year. You can reach out to a professional financial advisor for guidance on how to plan and manage your finances in line with the latest tax slabs.
Given below are the short and long-term capital gains tax rate for the 2021 and 2022 tax year. However, before we do this, let’s understand a few things about the different types of gains, losses, and the taxes charged on each.
What are capital gains and losses and how are they taxed?
When you sell a capital asset, such as stocks, bonds, jewelry, real estate, etc., you can either have a profit or a loss. If the selling price is more than the purchasing price, you will earn a profit or a gain. On the other hand, you would suffer a loss if the selling price is lower than the purchasing price.
Now, your profits are seen as an earning by the government and are taxed. There are two types of taxes on capital gains as explained above – short-term capital gain tax and long-term capital gain tax. If you sell a capital asset after one year from the date of purchase or investment, your gains would be termed long-term gains. However, if you sell it in one year or less from the date of purchase or investment, your gains would be categorized as short-term gains.
What are the long-term capital gains tax rates for the 2021 and 2022 tax year?
Long-term capital gains tax rate is the tax you pay on your long-term gains held for more than a year. There are three tax brackets of 0%, 15%, and 20% that are charged based on your taxable income. In addition to this, the tax rate is also decided based on your filing status. There are four filing statuses in the U.S:
- Single filers
- Married filers filing jointly
- Married filers filing separately
- Head of household
Long-term capital gains tax rates for the 2021 tax year
Here is the table for long-term capital gains tax rate for the 2021 tax year for each category:
|Tax filing status||Tax rate: 0%||Tax rate: 15%||Tax rate: 20%|
|Single filers||Taxable income of up to $40,400||Taxable income from $40,400 to $445,850||Taxable income over $445,850|
|Married filers filing jointly||Taxable income of up to $80,800||Taxable income from $80,800 to $501,600||Taxable income over $501,600|
|Married filers filing separately||Taxable income of up to $40,400||Taxable income from $40,400 to $250,800||Taxable income over $250,800|
|Head of household||Taxable income of up to $54,100||Taxable income from $54,100 to $473,750||Taxable income over $473,750|
Long-term capital gains tax rates for the 2022 tax year
Here is the table for long-term capital gains tax rate for the 2022 tax year for each category:
|Tax filing status||Tax rate:0%||Tax rate: 15%||Tax rate: 20%|
|Single filers||Taxable income of up to $41,675||Taxable income from $41,675 to $459,750||Taxable income over $459,750|
|Married filers filing jointly||Taxable income of up to $83,350||Taxable income from $83,350 to $517,200||Taxable income over $517,200|
|Married filers filing separately||Taxable income of up to $41,675||Taxable income from $41,675 to $258,600||Taxable income over $258,600|
|Head of household||Taxable income of up to $55,800||Taxable income from $55,800 to $488,500||Taxable income over $488,500|
What are the short-term capital gains tax rates for the 2021 and 2022 tax year?
Short-term capital gains tax is the tax you pay when you hold an asset for a year or less. Unlike long-term capital gains, your short-term gains do not have a separate tax table. Instead, they are added to your total income for a particular financial year and taxed as per ordinary income tax slabs. This implies there are seven tax rates that you could be charged, which are 10%, 12%, 22%, 24%, 32%, 35%, or 37%. These are the same as federal income tax rates. Moreover, just like long-term capital gains, short-term gains are also charged differently from different taxpayers.
Short-term capital gains tax rates for the 2021 tax year
Here is the table for short-term capital gains tax rate for the 2021 tax year for each category:
|Short-term capital gains tax rate||Single filers||Married filers filing jointly||Married filers filing separately||Head of household|
|10%||Taxable income from $0 to $9,950||Taxable income from $0 to $19,900||Taxable income from $0 to $9,950||Taxable income from $0 to $14,200|
|12%||Taxable income from $9,950 to $40,525||Taxable income from $19,900 to $81,050||Taxable income from $9,950 to $40,525||Taxable income from $14,200 to $54,200|
|22%||Taxable income from $40,525 to $86,375||Taxable income from $81,050 to $172,750||Taxable income from $40,525 to $86,375||Taxable income from $54,200 to $86,350|
|24%||Taxable income from $86,375 to $164,925||Taxable income from $172,750 to $329,850||Taxable income from $86,375 to $164,925||Taxable income from $86,350 to $164,900|
|32%||Taxable income from $164,925 to $209,425||Taxable income from $329,850 to $418,850||Taxable income from $164,925 to $209,425||Taxable income from $164,900 to $209,400|
|35%||Taxable income from $209,425 to $523,600||Taxable income from $418,850 to $628,300||Taxable income from $209,425 to $314,150||Taxable income from $209,400 to $523,600|
|37%||Taxable income of $523,600 or more||Taxable income of $628,300 or more||Taxable income of $314,150 or more||Taxable income of $523,600 or more|
Short-term capital gains tax rates for the 2022 tax year
Here is the table for short-term capital gains tax rate for the 2022 tax year for each category:
|Short-term capital gains tax rate||Single filers||Married filers filing jointly||Married filers filing separately||Head of household|
|10%||Taxable income from $0 to $10,275||Taxable income from $0 to $20,550||Taxable income from $0 to $10,275||Taxable income from $0 to $14,650|
|12%||Taxable income from $10,275 to $41,775||Taxable income from $20,550 to $83,550||Taxable income from $10,275 to $41,775||Taxable income from $14,650 to $55,900|
|22%||Taxable income from $41,775 to $89,075||Taxable income from $83,550 to $178,150||Taxable income from $41,775 to $89,075||Taxable income from $55,900 to $89,050|
|24%||Taxable income from $89,075 to $170,050||Taxable income from $178,150 to $340,100||Taxable income from $89,075 to $170,050||Taxable income from $89,050 to $170,050|
|32%||Taxable income from $170,050 to $215,950||Taxable income from $340,100 to $431,900||Taxable income from $170,050 to $215,950||Taxable income from $170,050 to $215,950|
|35%||Taxable income from $215,950 to $539,900||Taxable income from $431,900 to $647,850||Taxable income from $215,950 to $323,925||Taxable income from $215,950 to $539,900|
|37%||Taxable income of $539,900 or more||Taxable income of $647,850 or more||Taxable income of $323,925 or more||Taxable income of $539,900 or more|
Capital gains taxes on collectibles
Other than the above tax rates, there is a separate tax charged on collectibles. Short-term gains from the sale of collectibles are added to your taxable income for the year and taxed accordingly. However, long-term gains are charged at a flat capital gains tax rate of 28%. According to the IRS, collectibles can include musical instruments, stamps, precious metals and gems, artwork, rugs, antiques, coins, as well as valuable wines or other alcoholic beverages. An important thing to note here is that since precious metals are considered to be collectibles and taxed differently, your capital gains from a mutual fund or any other similar investment that invests in precious metals are also taxed as collectibles at 28%.
Capital gains taxes on real estate
The capital gains from the sale of real estate typically qualify for tax, but there are some thresholds that may be exempt from any tax. Here are these limits:
- You can exclude up to $250,000 from your capital gains from the sale of real estate if you are filing your taxes as a single individual.
- You can exclude up to $500,000 from your capital gains from the sale of real estate if you are filing your taxes jointly as a married individual with your spouse.
You can claim this exemption if you have lived in the home for at least two years out of the five years before selling the house.
However, you would have to pay the whole tax if you meet any of the following criteria:
- You own the property for less than two years out of the five years before selling the house. However, disabled taxpayers and military or foreign service professionals may be able to get an exemption here.
- The house is not your principal residence.
- You have claimed an exemption on another house two years before the sale of a home.
- You swapped this house for another one – 1031 exchange.
- You are paying expatriate tax.
How can you calculate your capital gains and losses for the year?
There are three steps in calculating your capital gains or losses for any financial year:
Step 1: To calculate your capital gains and losses, you need to first understand the cost basis of your investment. The cost basis is nothing but the purchase of your capital asset. For instance, suppose you bought five stocks for $2 dollars each. Now, when you calculate capital gains or losses on your stocks, you will consider the cost basis of $2 x 5 = $10. The cost basis also involves any commission like brokerage charged on the stock. So, if you have paid any charges on top of the cost basis, you can add them here when calculating your capital gains or losses.
Step 2: In the next step, you have to determine the realized amount. This is the amount you sell your capital assets for. For instance, taking the above example again, consider a scenario where you sold the five stocks that you bought for $2 each at $5 each. In that case, your realized value would be $25. However, to arrive at the realized value, you also have to deduct any fees or commissions paid.
Step 3: The last step involves subtracting the realized amount from the cost basis. If the realized amount is higher than the cost basis, you earn a profit known as a capital gain. For instance, your capital gain in the above example amounts to $15. However, if the realized amount is lower than the cost basis, you would suffer a capital loss. For example, if you sold the stocks for $1 each, you would have suffered a loss of $5 ($10 – $5).
Once you have ascertained your gains and losses, you have to also calculate your capital gains tax if you have made a profit. In order to do this, you can use IRS Form 8949 and Schedule D of IRS Form 1040. You would then have to add the results to Form 1040 when you file your tax return.
Net Investment Income Tax
The Net Investment Income Tax (NIIT) is charged on income that is above the statutory threshold amounts. It is applied at 3.8% per annum and is levied on individuals, trusts, and estates under Section 1411 of the IRS. The income is calculated after taking into account different sources like capital gains, rental income, royalties, dividends, interest, income from a trading business, sale of commodities, non-qualified annuities, and more. However, wages, alimony, operating income from a non-passive business, unemployment compensation, Social Security Benefits, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, as well as distributions from specific Qualified Plans are not included when calculating NIIT.
Moreover, only capital gains that have not been offset by capital losses are included when computing NIIT. Here are the threshold amounts for NIIT in the 2022 tax year:
|Filing Status||Threshold Amount|
|Married filers filing jointly||$250,000|
|Married filers filing separately||$125,000|
|Head of household||$200,000|
|Qualifying widow/ widower with a dependent child||$250,000|
How to plan your taxes
Long and short-term capital gains tax rates are taxed differently. So, it may be advisable to be prudent and ascertain their implications on your finances before making a move. Typically, the long-term capital gains tax rate would likely be lower, especially if you fall in a high-income bracket otherwise. So, it may be wise to wait a little while longer and hold on to your asset for at least a year if possible. It can help to look at your profits and losses as a whole. The sale price alone does not dictate your profit or loss until you add the tax to it. Having said that, there are strategies like tax-loss harvesting that can help you offset the tax on gains by using your losses. A financial advisor may be able to help you here.
Long and short-term capital gains tax rate slabs are revised almost every year. So, it is in your best interest to be up to date on them. This way, you make the best buying and selling decisions and are able to book higher profits. However, if you wish to understand more on your finances and how you may use effective tax-saving strategies to lower your tax liabilities, you may consider hiring a professional financial advisor for advice on how to suitably manage your finances. Use Paladin Registry’s free advisor match tool and get matched with 1-3 qualified advisors who may be able to help you with your unique financial goals and requirements.
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