Understanding capital gains tax is crucial for investors. This guide explains long-term capital gains tax, covering what it is, how it’s calculated, and applicable tax rates.
Capital assets encompass nearly everything you own for personal or investment purposes. This includes your home, personal belongings like furniture, and investment holdings like stocks and bonds. When you sell a capital asset, the difference between its adjusted basis and the sale price results in either a capital gain or a capital loss. Typically, the asset’s basis is its original cost. However, if you received the asset as a gift or inheritance, refer to IRS Publication 551, Basis of Assets, for detailed basis determination. A capital gain occurs when you sell the asset for more than its adjusted basis, while a capital loss occurs when you sell it for less. It’s important to note that losses from selling personal-use property, such as your home or car, are generally not tax-deductible.
Long-Term vs. Short-Term Capital Gains
To accurately determine your net capital gain or loss, capital gains and losses are categorized as either long-term or short-term.
Generally, if you hold an asset for more than one year before selling it, any resulting capital gain or loss is considered long-term. Conversely, if you hold the asset for one year or less, the capital gain or loss is classified as short-term. There are exceptions to this rule, such as property acquired as a gift, property inherited from a deceased individual, or certain patent properties. For these exceptions, consult IRS Publication 544, Sales and Other Dispositions of Assets; for commodity futures, refer to Publication 550, Investment Income and Expenses; and for applicable partnership interests, see Publication 541, Partnerships. To calculate the holding period, start counting from the day after you acquired the asset up to and including the day you disposed of it.
Long Term Capital Gains Tax Rates
If you have a net capital gain, a lower tax rate may apply compared to your ordinary income tax rate. The “net capital gain” is the amount by which your net long-term capital gain for the year exceeds your net short-term capital loss for the year. The “net long-term capital gain” is calculated by subtracting long-term capital losses (including any unused long-term capital loss carried over from previous years) from long-term capital gains. “Net short-term capital loss” is the amount by which short-term capital losses (including any unused short-term capital losses carried over from previous years) exceed short-term capital gains for the year.
Net capital gains are taxed at different rates depending on your overall taxable income. Some or all of your net capital gain may even be taxed at 0%.
For the 2024 tax year, the tax rate on most net capital gains is capped at 15% for most individuals. A 0% capital gains rate applies if your taxable income is at or below:
- $47,025 for single filers and those married filing separately.
- $94,050 for those married filing jointly and qualifying surviving spouses.
- $63,000 for heads of household.
A 15% capital gains rate applies if your taxable income falls within these ranges:
- More than $47,025 but less than or equal to $518,900 for single filers.
- More than $47,025 but less than or equal to $291,850 for those married filing separately.
- More than $94,050 but less than or equal to $583,750 for those married filing jointly and qualifying surviving spouses.
- More than $63,000 but less than or equal to $551,350 for heads of household.
However, a 20% capital gains rate applies to the extent that your taxable income exceeds these thresholds.
There are also exceptions where capital gains may be taxed at rates exceeding 20%:
- The taxable portion of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate.
- Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
- The portion of any unrecaptured Section 1250 gain from selling Section 1250 real property is taxed at a maximum 25% rate.
Important Note: Net short-term capital gains are taxed as ordinary income at your regular income tax rates.
Limits on Deducting and Carrying Over Capital Losses
If your capital losses exceed your capital gains, the amount of the excess loss you can deduct to lower your income is limited to the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses. You’ll claim this loss on line 7 of your Form 1040, Form 1040-SR, or Form 1040-NR. If your net capital loss exceeds this limit, you can carry the excess loss forward to future tax years. Use the Capital Loss Carryover Worksheet found in IRS Publication 550 or in the Instructions for Schedule D (Form 1040) PDF to calculate the amount you can carry forward.
Reporting Capital Gains and Losses
Most sales and other capital transactions, along with the calculation of capital gain or loss, are reported on Form 8949, Sales and Other Dispositions of Capital Assets. The summarized capital gains and deductible capital losses are then reported on Schedule D (Form 1040).
Estimated Tax Payments for Capital Gains
If you realize a taxable capital gain, you may be required to make estimated tax payments throughout the year. For more information, consult IRS Publication 505, Tax Withholding and Estimated Tax, Estimated Taxes, and the IRS Interactive Tax Assistant (ITA) tool “Am I required to make estimated tax payments?”.
Net Investment Income Tax (NIIT)
Individuals with substantial investment income may be subject to the Net Investment Income Tax (NIIT). For additional information on the NIIT, refer to IRS Topic no. 559.
Further Information
For more in-depth information on capital gains and losses, review IRS Publication 550 and Publication 544. If you sell your primary residence, refer to IRS Topic no. 701, Topic no. 703, and Publication 523, Selling Your Home.
This guide provides a comprehensive overview of long-term capital gains tax. Understanding these rules is essential for effective investment planning and tax compliance.
