Capital gain tax is the tax on an investor's profit when selling an investment or asset. You must pay capital gain tax when the investment or asset is sold in the tax year. The U.S. government considers gains made when you buy assets or investments and sell them for a profit as chargeable income.
The IRS has several capital gains tax rules. Depending on the filer's income, the capital gains tax rates for 2022 and 2023 are 0%, 15%, and 20% of the profit. Every year, the income brackets are modified.
The key tax implications for the majority of investors are:
- How long has an investor owned an investment or asset
- The cost of owning an investment or asset, including any fees paid,
- The income tax bracket
- Marital status
Moreover, gains from the trade of an asset are recognized as "realized gains." Unrealized gains are known throughout the time you owned an asset. However, if you don't sell, you won't have to pay capital gains taxes on them.
An investor would owe a long term capital gains tax for any investment held for more than one year. Short term capital gains tax is imposed if the investor holds the asset or investment for six months or less. The taxpayer's typical income band affects the short-term rate.
Capital Gains Tax Rates 2022: Long-term Vs. Short-term
Depending on how long an investor has owned the asset or investment, there are two categories of capital gains taxes: long-term and short-term.
Short-term: Revenues from the assets’ sale that you've owned for less than one year are subject to short term capital gains tax. You pay taxes on short-term gains at the same rate as taxes on a regular income, such as salary or wages.
Long-term: Long term capital gains tax is levied on assets or investments owned for more than one year. Depending on your income, the long term capital gains tax rates are 0%, 15%, and 20%. However, the average rate of income tax is often significantly higher than these rates.
How to Calculate Capital Gains Tax
Here is how to calculate your capital gains:
Calculate your basis: The price you ultimately paid for the investment or asset, including any commissions or fees.
Calculate your realized amount. This will be the asset's selling price less any fees or commission you paid.
The last step is subtracting the basis from the realized amount. A capital gain occurs if your sale price exceeds your basic price, and a capital loss is recognized if your sale price falls behind your basis price.
Most people use software that performs the calculations automatically to calculate their taxes (or have a professional do it for them). However, if you want a general sense of what you could pay on a hypothetical or real sale, you can utilize a capital gains tax calculator.
Capital Gains Tax Rates for 2022-2023
For taxation purposes, the profit on an asset or investment that an investor sold in less than one year after its purchase is typically taxed as though it were wages or pay. On a tax return, such gains are included with your regular or earned income.
In general, dividends paid by an investment or asset, which reflect profit even though they aren't capital gains, follow the same rules. For taxpayers in the 15% or higher tax bands, dividends are taxed as regular income in the U.S.
Long term capital gains, however, are subject to a separate system. The amount of tax you pay on assets held for more than one year and sold at a gain fluctuates according to a tax rate record that depends on the taxable income of the taxpayer for that year.
The capital gains tax rates for the tax years 2022 and 2023 are shown in the table below.
Tax Rates for Long term Capital Gains 2022
Filing Status | 0% Rate | 15% Rate | 20% Rate |
Single | Up to $41,675 | $41,676 - $459,750 | Over $459,750 |
Married Filing Jointly | Up to $83,350 | $83,351 - $517,200 | Over $517,200 |
Married Filing Separately | Up to $41,675 | $41,676 - $258,600 | Over $258,600 |
Head of Household | Up to $55,800 | $55,801 - $488,500 | Over $488,500 |
Long-term Capital Gains Tax Rates for 2023
Filing Status | 0% Rate | 15% Rate | 20% Rate |
Single | Up to $44,625 | $44,626 - $492,300 | Over $492,300 |
Married Filing Jointly | Up to $89,250 | $89,251 - $553,850 | Over $553,850 |
Married Filing Separately | Up to $44,625 | $44,626 - $276,900 | Over $276,900 |
Head of Household | Up to $59,750 | $55,801 - $523,050 | Over $523,050 |
How to reduce or avoid Capital Gains Taxes
You must pay capital gains taxes on any profits from investments. However, there are a variety of entirely legal strategies to reduce your capital gains taxes, including the following:
Keep your investment in place for longer than one year. If not, the profit is considered ordinary income, so you'll probably have to pay more.
Remember that you can deduct up to $3,000 worth of investment losses from your profits each year. Some investors take compelling advantage of this information. To balance their gains for the year, for instance, they can sell a loser at the end of the year.
Keep a record of any deductible costs you incur when creating or keeping your investment. They will raise the investment's cost basis and lower its taxable profit.
