Capital Gain Tax: How to Secure the Lowest Rates
Most possessions you own, whether used for personal or investment purposes, are considered capital assets. These may include your home, vehicle, furniture, jewelry, and investment-held assets like stocks and bonds. When you decide to sell these assets for more than their original cost, the profit you make is called a capital gain. The government will impose a tax on this profit; however, the rate they impose depends on various factors, including how long you hold the asset before selling it. In this guide, we’ll learn the difference between short-term versus long-term capital gains and their corresponding tax implications.
How Capital Gain Tax Works
Capital gains tax is a tax applied to the profits earned from selling an asset.
Your taxable income, filing status, and the length of time you held the asset are factors that determine the tax rate. This rate typically ranges from 0% to 37%.
Capital gains are divided into two categories: short-term and long-term. Profits from the sale of an asset held for a year or less, known as short-term capital gains, face a higher tax rate. In contrast, long-term capital gains, derived from assets held for more than a year, typically incur lower tax rates. Essentially, the tax rate becomes more favorable on your gains the longer you retain the asset.
Short-Term Versus Long-Term Capital Gains
Short-Term Capital Gains
Selling an asset within a year of acquiring it classifies the resulting profit as a short-term capital gain. The tax on short-term gains aligns with your ordinary income tax bracket, which can range from 10% to 37%, depending on your taxable income.
2023 Short-Term Capital Gains Tax Rate
| Tax Rate | Single Filer | Married Couple Filing Separately | Married Couple Filing Jointly | Head of Household |
| 10% | $0 to $11,000 | $0 to $11,000 | $0 to $22,000 | $0 to $15,700 |
| 12% | $11,001 to $44,725 | $11,001 to $44,725 | $22,001 to $89,450 | $15,701 to $59,850 |
| 22% | $44,726 to $95,375 | $44,726 to $95,375 | $89,451 to $190,750 | $59,851 to $95,350 |
| 24% | $95,376 to $182,100 | $95,376 to $182,100 | $190,751 to $364,200 | $95,351 to $182,100 |
| 32% | $182,101 to $231,250 | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 |
| 35% | $231,251 to $578,125 | $231,251 to $346,875 | $462,501 to $693,750 | $231,251 to $578,100 |
| 37% | $578,126 or above | $346,876 or above | $693,751 or above | $578,101 or above |
2024 Short-Term Capital Gains Tax Rate
| Tax Rate | Single Filer | Married Couple Filing Separately | Married Couple Filing Jointly | Head of Household |
| 10% | $0 to $11,600 | $0 to $11,600 | $0 to $23,220 | $0 to $16,550 |
| 12% | $11,601 to $47,150 | $11,601 to $47,150 | $23,221 to $94,300 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $47,151 to $100,525 | $94,301 to $201,050 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $100,525 to $191,950 | $201,051 to $383,900 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $243,726 to $365,600 | $487,451 to $731,200 | $243,701 to $609,350 |
| 37% | $609,351 or above | $365,601 or above | $731,201 or above | $609,351 or above |
Long-Term Capital Gains
Resulting profits from assets held for more than a year fall into the long-term category. The tax rates for long-term capital gains are generally lower than those for short-term gains. As of the latest tax regulations, the rates are 0%, 15%, or 20%, contingent on the individual’s income level.
2023 Long-Term Capital Gains Tax Rate
| Tax Rate | Single Filer | Married Couple Filing Separately | Married Couple Filing Jointly | Head of Household |
| 0% | $0 to $44,625 | $0 to $44,625 | $0 to $89,250 | $0 to $59,750 |
| 15% | $44,626 to $492,300 | $44,626 to $276,900 | $89,251 to $553,850 | $59,751 to $523,750 |
| 20% | $492,301 or above | $276,901 or above | $553,851 or above | $523,751 or above |
2024 Long-Term Capital Gains Tax Rate
| Tax Rate | Single Filer | Married Couple Filing Separately | Married Couple Filing Jointly | Head of Household |
| 0% | $0 to $47,025 | $0 to $47,025 | $0 to $94,050 | $0 to $63,000 |
| 15% | $47,026 to $518,900 | $47,026 to $291,850 | $94,051 to $583,750 | $63,001 to $551,350 |
| 20% | $518,901 or above | $291,851 or above | $583,751 or above | $551,351 or above |
Calculating Tax on Asset Sale
Here is a step-by-step guide on calculating capital gains, along with a practical example.
Step 1: Identify the Cost Basis
The cost basis encompasses the entire amount paid to acquire an asset. This includes the purchase price and any associated transaction costs.
Step 2: Determine the Selling Price
The selling price represents the amount at which you sold the asset, reflecting the total revenue generated from the sale.
Step 3: Calculate the Capital Gain
Subtract the cost basis from the selling price to determine the capital gain. The formula is:
Capital Gain = Selling Price − Cost Basis
Step 4: Apply the Appropriate Tax Rate
Identify whether the capital gain is short-term or long-term based on the holding period. Apply the corresponding tax rate to the capital gain amount.
Example:
Suppose you purchased real estate for $150,000 and sold it after holding it for three years in 2023 for $200,000. The long-term capital gain would be $50,000. If you are filing as a single filer with a taxable income of $90,000, you would be in the 15% tax bracket for long-term capital gains. The calculated tax owed would be $7,500 (15% of $50,000).
Reporting Taxes with Peace of Mind
When it comes to taxes, strategic planning is essential to ensure that you pay the least amount of taxes possible. One effective way is to hold onto your assets for more than a year to qualify for favorable long-term capital gains tax rates.
If you need further assistance with minimizing or reporting your capital gains tax, contact us at Peace of Mind Tax Help. Our experienced professionals are ready to help you navigate the complex world of taxes and find the best strategies to ensure you keep more of your hard-earned money in your pocket.