All of the investments you own are considered capital assets in the eyes of the IRS, including homes, stocks, bonds and more.
When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. An asset’s basis is its original cost to the owner, generally.
Capital gains are the profits you make from selling these investments. In most cases, you’re required to report a capital gain on your federal income tax return.
The amount of capital gains tax you pay depends on how long you held onto the asset before selling it.
Short-Term vs. Long-Term Capital Gains Tax
Capital gains and losses are classified in two ways:
- Short-term – If you hold the asset for one year or less.
- Long-term – If you hold the asset for more than one year before you sell it.
Short-term capital gains don’t benefit from a special tax rate. They are taxed at ordinary income tax rates, such as wages or salary. The rate you pay depends on your filing status and total taxable income for the year.
Long-term capital gains (profits you make on selling assets you’ve held for more than 365 days) are taxed at preferential rates, meaning you can benefit from a reduced tax rate. The tax you pay on assets held for more than a year and sold at a profit varies according to a rate schedule based on income thresholds.
In 2020, long-term capital gains tax rates are either 0%, 15% or 20% for most assets. Short-term capital gains tax rates, however, correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).
What is the Capital Gains Tax Rate?
The short-term capital gains tax rate is:
|Rate||Single Filers||Heads of Household||Married Filers|
|37%||$518,401 or more||$518,401 or more||$622,051 or more|
The long-term capital gains tax rate is:
|Year||Tax Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|2020||0%||< $40,000||< $80,000||< $40,000||< $53,600|
|2020||15%||$40,000 – $441,450||$80,001 – $496,600||$40,001 – $248,300||$53,601 – $469,050|
|2020||20%||> $441,450||> $80,800||> $248,300||> $469,050|
|2021||0%||< $40,400||< $80,800||< $40,400||< $54,100|
|2021||15%||$40,401 – $445,850||$80,800 – $501,600||$40,400 – $250,800||$54,100 – $473,750|
|2021||20%||> $445,850||> $501,600||> $250,800||> $476,750|
As you can see, the capital gains tax rate will be lower for most people if they realize a capital gain after more than one year.
For example, suppose you bought 200 shares of a stock at $50 per share and sold them at $100 per share. Your regular income from earnings is $100,000 a year and you are part of a married couple that files jointly. The chart below compares the taxes you’d pay if you held and sold the stock in more than a year (long-term) and less than a year (short-term).
Capital Gains Tax: Long-term vs. Short-term
|Transactions and consequences||Long-term capital gain||Short-term capital gain|
|Bought 200 shares @ $50||$10,000||$10,000|
|Sold 200 shares @ $100||$20,000||$20,000|
|Capital gain||$1,500 (taxed @ 15%)||$2,200 (taxed @ 22%)|
|Profit after tax||$8,500||$7,800|
How to Reduce or Avoid Capital Gains Tax
There are several ways to minimize or even avoid capital gains taxes.
To reduce your capital gains taxes, consider the long-term approach and hold your appreciated stock or other assets longer than one year prior to selling to avoid higher tax rates. Another consideration is investing capital gains in tax-advantaged retirement accounts, such as IRAs and 401(k)s, which allows your investments to grow on a tax-deferred or even tax-free basis.
Also, don’t forget you can use capital losses to offset capitals gains if you sell a different capital asset for less than its basis.
To avoid capital gains tax altogether, consider donating your appreciated asset directly to charity.
Those savings can then be directed to important programs and initiatives that align with your philanthropic passions.
By gifting appreciated assets into a donor-advised fund, you not only avoid the capital gains tax you would have owed, but, if you itemize deductions, you can also claim a charitable deduction for the donated stock’s fair market value.
The result is leveraging your contribution for a bigger financial impact in your community while also securing a better tax break. In other words, your charitable investments and assets go much further.
The San Diego Foundation’s charitable giving experts simplify the process of contributing stock and other appreciated securities to meet your personal philanthropic goals. To donate capital assets or learn more about donor-advised funds and tax benefits, contact our Development & Stewardship team.