As the saying goes, there’s nothing certain in this world but death and taxes. If you’re selling an investment for a profit, you should expect to pay taxes on the money that you’ve made. However, taxes on this type of income can work differently from typical income taxes, making it important to understand how capital gains taxes work, what the tax rates are, and how you can calculate your overall bill.
What Are Capital Gains?
Capital gains are the profits you earn from selling an investment. The investment in question is usually an asset like a stock or bond but it can also include things like real estate.
When you sell an asset, you can figure your capital gain by taking the amount you sold it for and subtracting the amount you paid.
👉 For example: If you buy a stock for $50, then sell it for $75, your total capital gain would be $75 – $50 = $25.
You can also experience capital losses, where you sell something for less than you paid.
👉 For example: Imagine buying a stock for $50 and then selling it for $40. In that scenario, you would have a capital loss of $50 – $40 = $10.
The capital gains taxes you have to pay will be based on your net capital gains. If you sell multiple investments, some for a loss and some for a gain, you have to calculate how much you made (or lost) overall.
Short-Term Capital Gains vs. Long-Term Capital Gains
Some capital gains are treated differently from regular income when it comes to taxes. What determines how the gains are treated is whether the gains are considered short-term or long-term.
If you buy an investment and hold it for less than a full year, any profits you earn are considered short-term capital gains because you only held the asset for a short period.
The good news is that short-term capital gains taxes are simple. You treat short-term capital gains like regular income, and they’re taxed at your normal income tax rate.
If you hold an asset for more than one year, then any profits you earn from selling it are considered long-term capital gains. Long-term capital gains receive preferential tax treatment, so you’ll pay a lower tax rate on these gains. Like income taxes, the rate you pay will be based on your taxable income for the year.
Federal Capital Gains Tax Rates
The federal government assesses capital gains taxes at the following rates.
2021 Capital Gains Tax Rates
2021 Short-term capital gains tax rates
| Tax rate based on income | Single filers | Head of household | Married filing jointly/qualifying widow | Married filing separately |
|---|---|---|---|---|
| 10% | $0 to $9,950 | $0 to $14,200 | $0 to $19,900 | $0 to $9,950 |
| 12% | $9,951 to $40,525 | $14,201 to $54,200 | $19,901 to $81,050 | $9,951 to $40,525 |
| 22% | $40,526 to $86,375 | $54,201 to $86,350 | $81,051 to $172,750 | $40,526 to $86,375 |
| 24% | $86,376 to $164,925 | $86,351 to $164,900 | $172,751 to $329,850 | $86,376 to $164,925 |
| 32% | $164,926 to $209,425 | $164,901 to $209,400 | $329,851 to $418,850 | $164,926 to $209,425 |
| 35% | $209,426 to $523,600 | $209,401 to $523,600 | $418,851 to $628,300 | $209,426 to $314,150 |
| 37% | $523,600 or more | $523,600 or more | $628,300 or more | $314,151 or more |
2021 Long-term capital gains tax rates
| Tax rate based on income | Single filers | Head of household | Married filing jointly/qualifying widow | Married filing separately |
|---|---|---|---|---|
| 0% | $0 to $40,400 | $0 to $54,100 | $0 to $80,800 | $0 to $40,400 |
| 15% | $40,401 to $445,850 | $54,101 to $473,750 | $80,801 to $501,600 | $40,401 to $250,800 |
| 20% | $445,851 or more | $473,750 or more | $501,601 or more | $250,800 or more |
2022 Capital Gains Tax Rates
2022 Short-term capital gains tax rates
| Tax rate based on income | Single filers | Head of household | Married filing jointly/qualifying widow | Married filing separately |
|---|---|---|---|---|
| 10% | $0 to $10,275 | $0 to $14,650 | $0 to $20,550 | $0 to $10,275 |
| 12% | $10,276 to $41,775 | $14,651 to $55,900 | $20,551 to $83,550 | $10,276 to $41,775 |
| 22% | $41,776 to $89,075 | $55,901 to $89,050 | $83,551 to $178,150 | $41,776 to $89,075 |
| 24% | $89,076 to $170,050 | $89,051 to $170,050 | $178,151 to $340,100 | $89,076 to $170,050 |
| 32% | $170,051 to $215,950 | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $323,925 |
| 37% | $539,901 or more | $539,901 or more | $647,851 or more | $323,926 or more |
2022 Long-term capital gains tax rates
| Tax rate based on income | Single filers | Head of household | Married filing jointly/qualifying widow | Married filing separately |
|---|---|---|---|---|
| 0% | $0 to $41,675 | $0 to $55,800 | $0 to $83,350 | $0 to $41,675 |
| 15% | $41,676 to $459,750 | $55,801 to $488,500 | $83,351 to $517,200 | $41,676 $258,600 |
| 20% | $459,751 or more | $488,501 or more | $517,201 or more | $258,601 or more |
State Capital Gain Taxes
On top of federal capital gains taxes, you may also have to pay state capital gains taxes. How these taxes work, as well as the tax rate, can vary from state to state.
For example, in 2021, Massachusetts charged 5% for long-term capital gains and 12% for short-term capital gains while Wyoming doesn’t charge capital gains taxes at all.
When thinking about the size of your tax bill, you need to consider both federal and state taxes.
How to Calculate Your Tax Bill
To calculate your capital gains tax bill, you’ll need a few pieces of information.
First, you need to know how much taxable income you have in a year. To calculate this, simply add all of the money you’ve earned and subtract deductions such as retirement account contributions and the standard deduction.
Then, you need to calculate your short-term capital gains. To do this, you’ll need to know the price you paid for every investment you sold during the year plus the price at which you sold those investments. If that sounds like a lot, the good news is that your brokerage should send you this information.
Subtract your short-term losses from your short-term gains to find your net short-term gains for the year. Multiply those gains by the tax rate for the tax bracket you fall into to find your short-term capital gains tax for the year.
👉 Note: You might wind up moving to a higher tax bracket due to your capital gains, in which case a portion of the gains get taxed at the higher rate, which can make the math slightly more complicated. The higher rate will only apply to income above the threshold for that tax bracket.
Learn more about how taxes work
If your losses exceed the gains, you can deduct up to $3,000 of those losses from your normal income to reduce your tax bill. If you lost more than $3,000, you may carry those losses to future years to take deductions in the future.
👉 For example: Imagine you have $5,000 of short-term gains in 2022 along with $3,000 in short-term losses. Your net short-term gains would be $2,000.
If your taxable income was $45,000 and you’re filing as a single person, you’d pay tax at a rate of 22% on that $2,000 in gains, for a total tax bill of $440 on your short-term gains.
Next, calculate your net long-term capital gains in the same way. Subtract your long-term losses from the long-term gains to find the net long-term gain. Multiply that number by the appropriate tax rate for your income to find your long-term capital gains tax.
Like with short-term losses, you can use a net long-term loss to offset regular income, up to a total of $3,000 per year across both long and short-term losses.
👉 For example: If you have $10,000 in long-term gains and $2,000 in long-term losses during 2022. Your net long-term capital gain is $8,000.
If your taxable income is $47,000 and you’re filing as a single person, you’d pay tax at a rate of 15% on those gains, making your long-term capital gains tax bill $1,200.
Conclusion
To make a long story short, short-term capital gains, meaning those on investments held for less than a year, are taxed like normal income. If you hold an investment for at least one year, you pay a noticeably lower tax rate on the gains, but still, you have to pay taxes.
Before you decide to sell an investment, consider the taxes you will pay on the proceeds and factor them into your calculations of gain or loss.
To reduce the amount of tax you pay on your investments, try to invest in tax-advantaged accounts like IRAs or 401(k)s and hold your investments for the long-term.
