Capital Gains Tax Rates in 2023: Now, You Have to Earn a Lot More to Pay More TaxesPublished:
Higher income thresholds mean I earn more without paying as much in capital gains taxes? Score! Oh, wait, that’s just inflation.
The capital gains tax rates for 2023 didn’t actually change. However, the capital gain rates you pay are based on your income taxes. To match rising inflation, the Internal Revenue Service (IRS) also increased the income thresholds required to pay for the higher capital gains tax rates.
For long-term capital gains, the maximum rate is 20%, if you held onto real property or other capital asset for longer than a year—and you earned $492,301 or more. The capital gain rates for long-term assets are pretty simple: 0%, 15%, or 20%. The rate you pay is based on where you fall based on the IRS income thresholds and your filing status. Married filing jointly has the highest thresholds; if a married couple filing a joint tax return will pay no capital gains taxes unless their income reaches $89,251. Individual earners face the lowest income thresholds: If they earn $44,626, they’ll pay 15% capital gain rates. If they earn $492,301, they’ll pay 20% in capital gains.
Short-term capital gains taxes are paid on assets you held for one year or less, including stocks, collectibles, crypto, or even real property (if you’re into flipping houses.) Short-term capital gains tax rates follow regular income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Calculating your capital gains tax can be complicated, as it depends on your filing status, type of asset, and taxable income. Uncle Sam may be entitled to a share of your gains, but it’s up to you to minimize it and keep more of your hard-earned money.
Keep in mind, these rates are for the gains and losses you get from January 1, 2023, to December 31, 2023. You’ll file this on your federal tax return in 2024.
How capital gains taxes work
Capital gains taxes are a type of tax on the profits generated from the sale of a capital asset. A capital asset is any asset owned by an individual or business, such as real estate, stocks, or precious metals.
Short-term gains are generated from assets that have been held for less than one year, while long-term gains are generated from assets that have been held for more than one year. The tax rates for these two types of gains differ, with short-term gains taxed at the same rate as an individual’s ordinary income tax rate, while long-term gains are taxed at a lower rate.
The tax owed on a capital gain depends on an individual’s income and their tax bracket. For example, if an individual falls into the highest tax bracket, they will owe a higher percentage of their long-term gains in taxes than an individual in a lower tax bracket.
The cost basis of an asset is the original purchase price of the asset, while capital improvements are expenses incurred to enhance the value of the asset. Both of these factors are taken into account when calculating the capital gain on an asset.
What’s considered a capital gain?
A capital gain is the profit made after selling an asset such as stocks, bonds, real estate, or collectibles. This profit is considered taxable income by the IRS and is thus subject to capital gains tax. Any asset that appreciates in value over time and generates a profit when sold is considered a capital gain and is subject to taxes on the gain.
For example, if an individual bought a house for $200,000 and later sold it for $300,000, they would have a gain of $100,000 and would be required to pay taxes on that gain. Similarly, if an individual purchased stocks for $10,000 and later sold them for $20,000, they would have a gain of $10,000.
Special gains rules apply to special assets. Think of real estate or rare collectibles, such as comic books or rare coins. For real estate, if it is used as a primary residence for at least two of the past five years, a married couple filing jointly can exclude up to $500,000 of gains from their tax return. For collectibles, such as artwork or precious metals, they are taxed at a higher rate of 28% rather than the standard capital gains tax rate.
Capital gains tax: Short-term vs. long-term
Capital gains tax is a tax on the profits that an individual or entity earns from selling assets like stocks, real estate, and collectibles. The amount of tax owed on these gains varies depending on how long the asset was held before being sold. Short-term capital gains refer to assets owned for less than a year, while long-term capital gains refer to assets owned for more than a year. The difference in tax rates between the two types of gains can have a significant impact on an individual’s tax liability. In this article, we will explore the differences between short-term and long-term capital gains tax rates, and how they can affect investment strategy.
Are there exceptions to long-term capital gains taxes?
Tax rates for long-term gains are better than short-term ones. With a few exceptions, of course. Gains from collectibles such as art, coins, and antiques are subject to a higher capital gains tax rate of 28%. Additionally, the 3.8% Net Investment Income Tax surtax applies to certain investment sales if your income exceeds certain thresholds.
Small business stocks that qualify as section 1202 assets may be taxed at a maximum 28% capital gain rate.
Selling collectibles, such as coins, art or comic books, can invite you into a maximum 28% capital gain rate for a long-term asset.
Selling depreciable real property (think barns, commercial building, warehouses, etc.) can get you a maximum 25% capital gain rate on those assets. Consult a financial advisor about whether your property qualifies as a Section 1250 property.
Different types of assets may also be subject to their own specific form of capital gains tax, such as real estate. Special rules may also apply for primary residences, rental properties, and other types of properties. It’s important to consult a tax advisor or financial advisor to fully understand the tax implications of any investment or sale of assets.
The 2023 Capital Gains Tax Rates
The capital gains tax rate for 2023 varies depending on the type and duration of the capital asset sold, taxable income, and filing status.
For short-term gains, which refers to assets held for less than one year, the tax rate is the same as ordinary income tax rate, which ranges from 10% to 37%.
On the other hand, long-term capital gains, those held for more than one year, have a separate tax rate that ranges from 0% to 20%. Single filers with a taxable income of up to $44,625 and married couples filing jointly with a taxable income of up to $89,250 are eligible for the 0% long-term capital gains tax rate. After that, tax payers wind up in the most common long-term capital gains rate: 15%.
There’s a big jump in income thresholds to qualify for the 20% capital gain rate.
Single taxpayers: $492,301 or more
Married filing jointly: $553,851 or more
Married filing separately: $276,901 or more
Head of household: $523,051 or more
However, special cases may apply, such as when selling collectibles, precious metals, or real estate, which may be subject to a higher tax rate of 28%. Additionally, high-income earners may be subject to surtax, which increases the long-term capital gains tax rate up to 23.8%.
Capital gains tax strategies: How to offset capital gains taxes
Capital gains taxes can significantly reduce your investment returns. Understanding how to avoid, reduce, or minimize these taxes is essential for any investor. In this article, we will cover some strategies to help you minimize your capital gains tax liabilities. Whether you’re a seasoned investor or just getting started, these tips could save you thousands of dollars in the long run. From understanding the types of assets that can be subject to capital gains taxes to exploring tax-loss harvesting techniques, read on to learn more about how you can minimize your capital gains taxes.
Capital losses: It’s not all bad.
When it comes to taxes, capital losses can play an important role in reducing your overall tax burden. If you’ve sold an investment for less than you purchased it for, you’ve incurred a capital loss. This loss can be used to offset any gain you may have earned in the same year, reducing the amount of taxes owed on that income.
If your losses exceed your gains, you can carry over the remaining losses to future tax years. However, there are some limitations on the use of capital losses. Taxpayers can only claim up to $3,000 in capital losses per year, and any unused losses can be carried over to the following tax year.
It’s important to note that capital losses and gains receive the same tax treatment, and only the net capital losses can be used to offset income. For example, if you have $5,000 in capital gains and $3,000 in capital losses, you would only owe taxes on $2,000 of the capital gains.
Overall, capital losses can be a valuable tool for reducing your tax burden, but there are limitations and rules to be aware of. Consulting a tax advisor or financial professional can help you make the most of your losses.