Capital Gains Tax – Short and Long Term Rates Plus Other Factors to Consider

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[Updated for 2014 and 2015 Capital Gain Tax Rates] When you sell a capital asset like a stock or a home you own, the difference between the amount you sell it for and what you paid for it (cost basis) is classified as a capital gain or a capital loss. Capital gains and losses are further classified as long-term or short-term, depending on how long you held the investment before you sold it. If you have held the asset more than one year, your capital gain or loss is classified as long-term. If you held the asset for one year or less, your capital gain or loss is considered short-term. Based on the duration of asset ownership and the tax filers personal tax rate, you can calculate their capital gains tax rate.

Seller Personal Tax Rate10%15%25%28%33%35%39.6%
Short Term CGT Rate10%15%25%28%33%35%39.6%
Long Term CGT Rate 0%0%15%15%15%15%20%

Short-term capital gains are taxed like ordinary income at tax rates. For example if Julia bought shares in Apple (AAPL) in February and sold them in November of the same year, her gain or loss on the investment will be classified as short-term.

Long-term capital gains (assets held for more than one year) are taxed at 0% for taxpayers in the 10% and 15% tax brackets and 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets. And under the latest tax legislation the long term capital gains rate for those in the 39.6% tax bracket rose to 20%. The 0% tax rates for those in the 10% and 15% federal income tax brackets was a special provision in the bush-era tax cuts which were extended to the current year.

If your capital losses are more than your capital gains, you can claim a capital loss deduction in your tax filing. Your allowable deduction is $3,000 ($1,500 if you are married and filing separately) and can be claimed against your ordinary income. There are various exceptions and special provisions when it comes to the treatment of capital gains or losses and you should consult IRS Publications 17 and 550 for more details. Some highlights are provided below.

Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, investment properties, stocks, options or bonds held in your personal account. When you sell a capital asset, the difference between the amount you sell it for and your (cost) basis, which is usually what you paid for it, is a capital gain or a capital loss. Capital gains are offset again capital losses, so your net capital gain/loss is the key figure to use in your tax planning.

  • If your capital losses are more than your capital gains, you can claim a capital loss deduction. Your allowable deduction is $3,000 ($1,500 if you are married and filing separately). You can use your total net loss to reduce your ordinary taxable income up to the $3,000 limit. So make sure at the end of year, to sell some “losses” up to $3,000. You can always buy back the stocks after 30 days (to avoid the wash rule discussed below), and thereby reduce your overall cost basis.
  • Dividends paid out of the earnings and profits of a corporation – are generally ordinary income to you. This means they are not capital gains, and so do not qualify for the lower tax capital gain rates.
  • Capital gain distributions (also called capital gain dividends) paid to you by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs) are also subject to the above tax rules. Report capital gain distributions as long-term capital gain regardless of how long you have held the investment.
  • Beware the Wash Sale rule. You (or your spouse) cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stocks or securities at a loss and within 30 days before or after the sale you:
    – Buy substantially identical stock or securities
    – Acquire substantially identical stocks and securities
    – Acquire a contract or option to buy substantially identical stock or securities.
  • Gain or loss from the sale or trade of an option to buy or sell a capital asset are treated as capital gain or loss.
  • Capital loss carryover. If you have a total net loss that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in the subsequent year. If part of the loss is still unused, you can carry it over to later years until it is completely exhausted. When you carry over a loss, it remains long term or short term (use this first). A long-term capital loss you carry over to the next tax year will reduce that year’s long-term capital gains before it reduces that year’s short-term capital gains
  •  If your long-term capital gains take you into a higher tax bracket, only the gains above that threshold will be taxed at the higher rate. In other words, if your long-term capital gains bring your taxable income $1 over the level for the 25%-35% bracket, only $1 will be taxed at 15%, and the rest of your long-term capital gains will be taxed at 0%.
  • Second, for single taxpayers who make more than $200,000 per year and married taxpayers who file jointly and earn more than $250,000, there is an additional 3.8% tax on investment income, including capital gains, above a certain level because of the net investment income tax.

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20 Comments on "Capital Gains Tax – Short and Long Term Rates Plus Other Factors to Consider"


[…] best advice about how to handle taxable gains may be to simply keep them in perspective. Long-term capital gains are typically taxed at either a 15 percent or 20 percent rate. That’s usually a lot lower than an […]

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[…] the stock market and if you have or are planning to sell stock this year you could liable for a big capital gains hit. Other than not selling the other thing is to sell the turkeys in your investment portfolio (yes […]

[…] to feel a little better about the losses incurred, at least I can eventually write them off as a capital loss and reduce my taxes. Really not a very good reason. So when I came across this article, “Are […]

Stan
Tuesday 9:06 pm

Is the profit of selling back foriegn currency to be seen as capitol gains?

Wednesday 9:17 pm

If you are trading foreign exchange (fx) currency to make money then yes the income (gain) from trading is taxable income and is reported as capital gain – long or short term depending how long you held the foreign currency – more. Gains on a personal (e.g for a trip or to send money overseas) foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.
If you held the foreign currency more than a year – the gain will be taxed at reduced rate – not more than 15%. If you held the currency less than a year – the gain will be taxed at your regular tax rate. State taxes are extra.

ron r
Tuesday 4:49 pm

My wife received an inheritance from her family trust that included stock. The value of those stocks
is known as of the date of death which were then cashed in this year. Is the capital gain taxed as
short term , long term or become incorporated into our taxable income total?

Chris
Sunday 10:06 am

Your clcok starts ticking on the date of transfer. Because you have a stepped up basis as of the date of death the you would refrence that date in determining the short of long term characterization of any gains for those holdings.

DUANE
Wednesday 4:42 pm

In 2012 I sold my interest in an office building I owned for 35 years. My personal income tax rate is at 10%. I roughed out schedule 8949, schedule D and the 1040. The experts indicate that I should not have to pay tax on the gain, yet I find nothing in the forms or instructions that so indicate. What have i overlooked.

[…] Investment Gains and Losses. Consider selling investment losers to offset any capital gains. When calculating your gains and losses, be sure to include mutual fund distributions; they are […]

patricia
Saturday 1:46 pm

Hello,
I have an insurance policy that I recently found out I can take the cash value and keep the paid up insurance. We are in the 15% tax bracked at this time-would I have to pay capital gains tax on this cash value?

Steve F.
Monday 4:17 pm

The answer is no. The cash taken out in the form of a loan will be tax free as long as the contract is paid up and does not lapse.

I would be happy to help with this if interested. Please respond.

[…] you are planning to invest or realize any capital gains next year get ready for higher taxes. Particularly if you are already in a higher income group. […]

[…] shows, the top tax rate will return to 39.6% (or 42% if you include deduction phaseouts). Long term capital gains would be taxed at 20%, while dividends and short term capital gains would be taxed as ordinary […]

John C
Thursday 1:44 am

Hi, I need some help here. I am in the 10% or less tax bracket. And I just walked through Form 1040, 8949 and Schedule D. Having gone through the steps/instructions on those forms/schedule several times, I still can not find the effective 0% tax rate for my long term capitcal gain on a piece of land. Did I miss something ?

Barbara
Wednesday 9:36 am

What is the impact if the bush tax cuts expire. Will the CGT go up?

[…] was so much lower than it should have been, since the highest tax rate on income from long-term capital gains and dividends is typically only15%, considerably less than the top rate of 35% levied on regular […]

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Judy Wetzel
Saturday 5:00 am

I have Iraqi Dinar that I would like to cash in for USD. What would a Iragi Dinar be worth as USD.

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