The 411 on Federal Capital Gains Tax: A Comprehensive Guide

Position：home

The 411 on Federal Capital Gains Tax: A Comprehensive Guide

What is Capital Gains Tax?

Capital gains tax is a levy imposed on the profits you make when you sell an asset, such as a stock, bond, or real estate. It's calculated as the difference between the asset's sale price and its cost basis, which includes the original purchase price plus any improvements made.

Federal Capital Gains Tax Rates

The federal capital gains tax rates vary depending on the holding period of the asset and your taxable income. For assets held for one year or less (short-term gains), the tax rate is the same as your ordinary income tax bracket. For assets held for more than one year (long-term gains), the rates are lower, starting at 0% for taxpayers in the lowest income bracket.

Taxable Income Bracket	Short-Term Capital Gains Rate	Long-Term Capital Gains Rate
0%–10%	Up to 39.6%	Up to 0%
10%–12%	Up to 39.6%	Up to 15%
12%–22%	Up to 39.6%	Up to 15%
22%–24%	Up to 39.6%	Up to 20%
24%–32%	Up to 39.6%	Up to 20%
32%–35%	Up to 39.6%	Up to 20%
35%–37%	Up to 39.6%	Up to 20%
37% or higher	Up to 39.6%	Up to 23.8%

Exclusions and Deductions

Certain types of capital gains are eligible for exclusions or deductions, including:

Home sale exclusion: Up to $250,000 ($500,000 for married couples) of gain on the sale of your primary residence can be excluded from taxation.
Section 121 exclusion: Up to $500,000 ($1,000,000 for married couples) of gain on the sale of small business stock can be excluded from taxation.
Deductible losses: Capital losses can be deducted against capital gains, up to a maximum of $3,000 per year.

Tax Harvesting

Tax harvesting is a strategy where you strategically sell assets with losses to offset gains from other assets, reducing your overall tax liability. By selling assets with losses, you create a "paper loss" that can be used to cancel out gains.

federal capital gains tax

Real-World Examples

If you sell a stock held for two years for $1,200, and your cost basis is $1,000, your capital gain is $200. If you are in the 15% long-term capital gains bracket, you would owe $30 in capital gains tax.
If you sell a house held for five years for $500,000, and your cost basis is $300,000, your capital gain is $200,000. If you are married and meet the requirements for the home sale exclusion, you would not owe any capital gains tax.
If you sell a rental property held for 10 years for $250,000, and your cost basis is $150,000, your capital gain is $100,000. If you have $50,000 in deductible capital losses from other assets, you could offset those losses against the $100,000 gain, resulting in a net capital gain of $50,000.

Frequently Asked Questions

When do I owe capital gains tax? You owe capital gains tax when you sell an asset that has increased in value since you purchased it.
How can I avoid capital gains tax? You can avoid capital gains tax by holding assets for more than one year before selling them, selling only assets that have decreased in value, or utilizing exclusions and deductions.
What is the difference between short-term and long-term capital gains? Short-term capital gains are taxed at the same rate as your ordinary income, while long-term capital gains are taxed at lower rates, starting at 0%.

The Bottom Line

Understanding federal capital gains tax is crucial when making investment decisions. By leveraging exclusions, deductions, and tax harvesting strategies, you can minimize your tax liability and maximize your returns. Consult with a qualified tax professional for personalized advice and guidance.

Additional Resources

Tables

Short-Term Capital Gains Tax Rates

Taxable Income Bracket	Tax Rate
0%–10%	Up to 39.6%
10%–12%	Up to 39.6%
12%–22%	Up to 39.6%
22%–24%	Up to 39.6%
24%–32%	Up to 39.6%
32%–35%	Up to 39.6%
35%–37%	Up to 39.6%
37% or higher	Up to 39.6%