Federal Capital Gains Tax Rate 2023: Everything You Need to Know

The federal capital gains tax is a tax on the profit you make when you sell an asset. The tax rate you pay depends on a few factors, including the type of asset you sold, how long you held it, and your income.

Types of Assets

The type of asset you sell will determine what capital gains tax rate you pay. There are two main types of assets:

• Short-term assets: These are assets that you have held for less than one year. Short-term capital gains are taxed at your ordinary income tax rate.
• Long-term assets: These are assets that you have held for one year or more. Long-term capital gains are taxed at a lower rate than short-term capital gains.

Holding Period

The holding period for an asset is the length of time you have held it before selling it. The holding period determines whether you pay short-term or long-term capital gains tax.

• Short-term holding period: If you sell an asset that you have held for less than one year, you will pay short-term capital gains tax.
• Long-term holding period: If you sell an asset that you have held for one year or more, you will pay long-term capital gains tax.

Income

Your income will also affect the capital gains tax rate you pay. The higher your income, the higher the tax rate you will pay on your capital gains.

The following table shows the federal capital gains tax rates for 2023:

Calculating Capital Gains

To calculate your capital gains, you need to subtract the cost of your asset from the sale price. The cost of your asset is also known as your basis.

• Basis: The basis of an asset is the amount you paid for it, plus any other costs that you incurred in acquiring it.
• Capital gains: Capital gains are the profit you make when you sell an asset for more than you paid for it.

Example

Let's say you bought a stock for $1,000. You hold the stock for five years, and the price goes up to $2,000. When you sell the stock, you will have a capital gain of $1,000.

Your capital gains tax liability will depend on your income and the holding period for the stock. If you sold the stock after holding it for less than one year, you would pay short-term capital gains tax at your ordinary income tax rate. If you sold the stock after holding it for one year or more, you would pay long-term capital gains tax at a lower rate.

Tips for Reducing Your Capital Gains Taxes

There are a few things you can do to reduce your capital gains taxes:

• Hold your assets for at least one year. This will allow you to pay long-term capital gains tax, which is a lower rate than short-term capital gains tax.
• Sell assets that have lost value. If you sell an asset for less than you paid for it, you will have a capital loss. Capital losses can be used to offset capital gains.
• Contribute assets to a charity. If you donate an asset to a charity, you can deduct the fair market value of the asset from your income. This can reduce your overall capital gains tax liability.
• Invest in tax-deferred accounts. There are a number of tax-deferred accounts that you can use to invest your money, such as 401(k)s and IRAs. The money in these accounts grows tax-free until you withdraw it.

Conclusion

The federal capital gains tax is a complex topic, but it is important to understand if you are planning to sell any assets. By following the tips in this article, you can reduce your capital gains taxes and keep more of your profits.

Additional Resources

• IRS Publication 550: Investment Income and Expenses
• Capital Gains Tax Calculator
• How to Avoid Capital Gains Taxes