What You Need to Know About Capital Gains Taxes
Jul 13, 2023
Selling assets can have implications for your taxes. Learn the basics of capital gains.
What Are Capital Gains?
Capital gains represent income you make from selling assets, including:
- Stocks and bonds
- Personal real estate
- Household items such as furniture, clothes, and jewelry
- Collectibles such as antiques, coins, and stamps
- Vehicles such as cars, boats, and motorcycles
The term “realized” indicates when that income is considered a taxable event. Capital gains are realized on the date the assets are sold and must be reported in that tax year.
Capital Gains, Losses, and Cost Basis
If you make more money from the sale than you paid for the asset, then that income is considered a capital gain. If you end up losing money — making less from the sale than you initially paid — that’s considered a capital loss. The amount you paid for an asset is called the cost basis.
Short-Term vs. Long-Term Capital Gains
When determining the tax rate on capital gains, the IRS takes into account how long you’ve owned the asset. Anything over a year is considered a long-term capital gain. Assets you’ve owned for a year or less are considered short-term capital gains.
Tax rates for short-term capital gains are typically higher than for long-term capital gains, ranging from 10% to 37% depending on your tax bracket and filing status.
How Are Capital Gains Taxed?
Taxation rules get a bit more complicated because taxes are determined by the net amount, which is calculated as follows:
- If your long-term capital gains for the year are larger than your short-term capital losses (including any losses carried over from previous years), the difference is your net capital gain.
- If your short-term losses for the year are higher than your short-term capital losses (including any carried over from previous years), the excess is your net short-term capital loss.
The tax rate for your net capital gains in 2023 is as follows:
- 0% if your taxable income is less than or equal to $44,625 (single or married filing separately), $89,250 (married filing jointly or qualifying surviving spouse), or $59,750 (head of household)
- 15% if your taxable income is between $44,626-$492,300 (single), $44,626-$276,900 (married filing separately), $89,251-$553,850 (married filing jointly or qualifying surviving spouse), or $59,751-$523,050 (head of household)
- 20% if your taxable income exceeds $492,300 (single), $276,900 (married filing separately), $553,850 (married filing jointly or qualifying surviving spouse), or $523,050 (head of household)
There are some exceptions when capital gains are taxed at an even higher rate.
How to Minimize Capital Gains Taxes
Several strategies can help you reduce your tax liability on capital gains. You can consider:
- Holding assets for at least one year to avoid higher short-term tax rates
- Selling some assets at a loss to offset your realized capital gains
- Timing the sale of profitable assets for those years when your tax bracket is lower
- Donating your assets to charity or willing them to your heirs, who will then inherit them at a “stepped-up” cost basis realized at the time of your death
Having a clear picture of your finances — from portfolios to tax brackets — is important when determining how to handle your assets. To understand how capital gains or losses can affect your particular tax situation, please schedule an appointment with our tax professionals.
