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The taxes you pay on profits from most investments, such as stocks, bonds, and mutual funds, are known as capital gains taxes. You must pay taxes on your gains at either the short-term capital gains rate or the long-term capital gains tax rate when you sell an investment for more than you originally paid for it.
The tax rate on long-term capital gains is lower than the tax rate on the majority of other income. Actually, depending on your income, long-term capital gains are taxed at either 200 percent, 2015 percent, or 2020 percent. The threshold for each rate can vary from one year to the next. Here are some things to consider regarding the 2021 capital gains tax rates and strategies to reduce the amount of taxes you have to pay the IRS when you sell investments that are profitable.
Capital gains taxes are levied on the profits you make from selling assets you’ve held for a certain period These assets can include stocks, bonds, real estate, and other investments. The tax rate you pay on capital gains depends on how long you’ve held the asset and your taxable income
Types of Capital Gains:
- Short-term capital gains: Profits from selling assets held for one year or less are taxed at the same rate as your ordinary income.
- Long-term capital gains: Profits from selling assets held for more than one year are taxed at lower rates than short-term gains.
Capital Gains Tax Rates for 2023:
| Filing Status | Taxable Income | Short-Term Rate | Long-Term Rate |
|---|---|---|---|
| Single | Up to $41,775 | 10% | 0% |
| Single | $41,776 to $89,075 | 12% | 15% |
| Single | $89,076 to $170,050 | 22% | 15% |
| Single | $170,051 to $215,950 | 24% | 15% |
| Single | $215,951 to $539,900 | 32% | 15% |
| Single | Over $539,900 | 37% | 20% |
| Married Filing Jointly | Up to $83,550 | 10% | 0% |
| Married Filing Jointly | $83,551 to $178,150 | 12% | 15% |
| Married Filing Jointly | $178,151 to $340,100 | 22% | 15% |
| Married Filing Jointly | $340,101 to $431,900 | 24% | 15% |
| Married Filing Jointly | $431,901 to $647,850 | 32% | 15% |
| Married Filing Jointly | Over $647,850 | 37% | 20% |
| Head of Household | Up to $55,900 | 10% | 0% |
| Head of Household | $55,901 to $111,800 | 12% | 15% |
| Head of Household | $111,801 to $223,600 | 22% | 15% |
| Head of Household | $223,601 to $275,350 | 24% | 15% |
| Head of Household | $275,351 to $590,750 | 32% | 15% |
| Head of Household | Over $590,750 | 37% | 20% |
Minimizing Capital Gains Taxes:
- Hold assets for more than one year: This allows you to take advantage of lower long-term capital gains rates.
- Invest in tax-advantaged accounts: IRAs, 401(k)s, and 529 plans allow you to grow your investments tax-free or tax-deferred.
- Sell your home: If you’ve owned and lived in your home for at least two years, you can exclude up to $250,000 of capital gains on the sale if you’re single, or up to $500,000 if you’re married filing jointly.
Capital Gains Taxes FAQs:
- What is the capital gains tax rate for collectibles?
Profits from selling collectibles, such as antiques, fine art, or coins, are taxed at a flat rate of 28%, regardless of how long you’ve held the item.
- What is the Net Investment Income Tax (NIIT)?
The NIIT is a 3.8% surtax on certain investment income, including capital gains, for individuals, estates, and trusts with high incomes.
- How are capital gains taxed in retirement accounts?
Capital gains in retirement accounts are not taxed until you withdraw the money. However, all withdrawals from taxable retirement accounts are taxed as ordinary income.
- How can capital losses affect my taxes?
If your capital losses exceed your capital gains, you can deduct up to $3,000 of the loss from your taxable income each year. Any remaining losses can be carried forward to future years.
Understanding capital gains taxes is essential for investors and taxpayers. By following the strategies outlined above, you can minimize your tax liability and maximize your investment returns.
Time the sale of profitable investments for low-income years
You might be eligible to have the gains taxed at a lower capital gains tax rate if you can hold off on selling profitable investments until a tax year when your income is lower.
What are the 2021 capital gains tax rates?
There are two types of capital gains taxes:
- Selling an investment after a year or less is subject to short-term capital gains taxes. Short-term capital gains will be taxed at your regular income tax rate. Given the differences between the 2020 and 2021 tax brackets, it’s probable that the rate you pay on short-term gains has also changed.
- If, after more than a year of ownership, you sell investments at a profit, you will be subject to long-term capital gains taxes. Long-term capital gains are subject to taxation at either 200%, 15%, 20%, or 20%0%, depending on your tax bracket.