If you earn money from the sale of a capital asset — your home, part of a business, stocks, or bonds, for example — that profit may be subject to capital gains tax.
There are two categories of capital gains: short term (assets held for a year or less) and long term (assets held for longer than one year). The day you acquire the asset isn't included in your holding period, but the day you sell it is.
Any net gain resulting from the sale of an asset with a short-term holding period will be added to your gross income and taxed as ordinary income at rates between 10% and 37%. Net gains considered long term are usually taxed at 15% or 20% depending on your total taxable income.
How much is capital gains tax?
The capital gains tax is generally favorable; you'll never pay a higher tax than what you would pay on your ordinary income. The short-term capital gains tax rates are the same as your federal income tax bracket.
Long-term capital gains rates range from 0% to 20%, except in special circumstances. Capital gains resulting from the sale of collectibles held long term, like fine art or a coin collection, are taxed at the highest rates: 28%. Certain gains from real estate can be taxed at 25%.
Here are the federal long-term capital gains rates for 2020:
Here are the federal long-term capital gains rates for 2021:
Note: Taxable income is your income after all deductions are taken.
How do you calculate capital gains?
Every capital asset you own has a basis, which is generally the amount you paid for the property initially, plus any taxes or commissions. If you received the asset as a gift or from inheritance, there's a special calculation for figuring out your adjusted tax basis.
To calculate the amount of gain (or loss), simply subtract the proceeds received on the date of the sale from your adjusted tax basis. If the proceeds are more than your basis, you'll generate a gain. If the proceeds are less than your basis, you'll generate a loss.
The capital gains tax rates apply to your net capital gains. If you had capital losses during the tax year (or from a previous year that you carried over), you may be able to use it to offset your gains.
How much is capital gains tax on the sale of a home?
Selling a home can generate a large capital gain, especially if you owned it for several years. Thankfully, single filers can exclude up to $250,000 of the gain and married filers can exclude up to $500,000 of the gain.
To qualify for the maximum exclusion, the taxpayer must have owned the home and used it as their personal residence for two of the last five years before selling. Partial exclusions are allowed if you sold your residence for a job or health reasons, or if you're married but only one spouse passes the ownership and use tests.
How do I pay capital gains taxes?
If you sold an asset that generated a large capital gain, you may be required to pay estimated quarterly taxes. You can complete a short questionnaire on the IRS website to figure out how to pay your capital gains tax.
What is the Net Investment Income Tax?
If you're someone with substantial investment income — including capital gains passive income, certain annuities, dividends, interest, rents, and royalties — you may have to pay an additional tax that goes toward supporting America's healthcare program.
The Net Investment Income Tax applies a flat rate of 3.8% to your investment income if your adjusted gross income (AGI) is above the following amounts for your filing status:
* Married filing jointly and qualifying widow(er): $250,000 or more
* Married filing separately: $125,000 or more
* Single and head of household: $200,000 or more