Table of Contents
What is the capital gains tax?
How does the capital gains tax work?
When is capital gains tax paid?
Short-term vs. long-term capital gains tax
Capital gains tax rates
Exceptions to capital gains tax rates
The bottom line
Jun 21, 2022
7 min read
Capital gains build wealth and grow assets, these are taxed differently depending on a number of factors like how long the asset was owned and how much the taxpayer earns.
Everyone loves it when a stock or other asset gains in value and is sold for a profit. But not all of that profit goes into an investor's pocket. The U.S. imposes taxes on those capital gains. Here’s a look at what capital gains taxes are, the current capital gains tax rate, and some exceptions to the tax liability.
The capital gains tax is a federal tax levied against any profit on the sale of capital assets. It is levied separately from income tax on normal wages.
Most taxpayers are already paying federal taxes on their wages, typically through automatic withholdings from their paycheck. However, if they are also making money by trading stock, that’s additional income and, from the government's perspective, should be taxed accordingly.
This means that if someone buys a stock, then later sells it for a profit, they’ll be expected to pay taxes on that profit — or the difference between what they paid and what they sold that capital asset for. (In some instances, if someone sells an asset for less than they paid, they may be able to claim a loss instead.)
The capital gains tax is designed to catch taxable events (like the sale of stock) that would otherwise be excluded from typical federal income tax.
Capital assets are items that, if sold for a profit, will trigger a capital gains taxable event. Examples of these types of assets include:
Nearly anything that is of significant value to investors, and can be sold for more than it was bought for, is considered a capital asset.
In order to determine whether capital gains taxes are due, first figure out whether the sale of the item was at a higher or lower cost than the price paid for the item.
The amount the item was sold for is an asset’s amount realized. The amount it was bought for, including any eligible related expenses, is its adjusted basis.
For example, if an individual buys a classic car for $15,000 and spends $10,000 to fix it up, the car’s adjusted basis (or the amount it was bought for) is considered to be $25,000. If they later sell that car for $45,000, they will likely owe capital gains tax on the difference, or $20,000.
Capital gains tax is due when the owner sells an asset for a profit. In some cases, individuals may pay capital gains tax when it comes time to file taxes. In other cases, they would pay taxes right away, or in quarterly installments.
Following a sizable gain from the sale of an asset, a taxpayer may be expected to begin making quarterly tax payments to the IRS, rather than waiting until the end of the year to do so.
Quarterly tax payments are generally expected if, after the capital gains taxable event, one expects to owe $1,000 or more on their taxes for the year, and if their new tax burden is more than either 100% of last year’s taxes due or 90% of their expected taxes for this year.
There are two categories of capital gains: short-term capital gains and long-term capital gains. Each is taxed differently.
Short-term capital gains (STCG) are incurred when an item that is held for one year or less is sold for profit. If someone purchases shares of a stock and then sells them a few months later, they’ll be taxed at the short-term capital gains tax rate.
Long-term capital gains, on the other hand, are incurred when an item that is held for longer than a year is sold for profit. These gains are taxed at the long-term capital gains tax rate, which is lower than short-term gains.
Gains on short-term capital assets—those held for a year or less— are taxed as ordinary income. This means that the gain is added to a taxpayer’s total taxable income for the year, and the combined income is taxed based on the standard, graduated tax brackets into which that income falls.
Gains on long-term capital assets—those held for more than a year—on the other hand, are taxed differently. An individual would tally up all their long-term capital gains throughout the year to figure out their net capital gain. That is taxed at between 0% to 28%, depending on the individual’s income and the type of asset.
Net capital gain (or loss) is one’s total long-term capital gains, minus any capital losses, both long- and short-term. (Short-term capital gains are counted as ordinary income.) If that is positive, the individual posts a net capital gain for the year. If it’s negative, a net capital loss.
The individual would have to pay taxes on net capital gains. Here are the 2022 tax rates for net capital gains:
As the chart above shows, the typical maximum capital gains tax rate is 20%. However, there are several exceptions to those capital gains tax rate rules. Here are the three primary ones:
There are many exceptions to capital gains made on owner-occupied homes.
All homeowners are eligible for a $250,000 capital gains exemption following the sale of their home, as long as that home has been used as their primary residence for at least two out of the last five years. (For eligible active duty military members, this can be extended to two out of the last 10 years.) That eligible amount doubles for married couples filing a joint tax return. This means that a couple could be exempt from up to $500,000 in capital gains from the sale of their property, as long as they lived in the home for the required period of time.
Additionally, the capital gains recognized from the sale of a real property can be deferred using what’s called a 1031, or Like-Kind, exchange. This exemption allows a property owner to purchase another property of the same type, using the proceeds (gains) from the sale of the first property without incurring additional capital gains taxes. An apartment building can be traded for an apartment building, for example, and a residential rental home can be traded for another residential rental home.
For example, let’s say an investor sells a single-family residential rental property for a $200,000 capital gain, and then purchases a new single-family residential rental property for at least $200,000. Thanks to the 1031 Like-Kind Exchange rule, they would not be required to pay capital gains taxes on that $200,000 gain from the original sale in that tax year.
Many investors use capital gains as a way to build wealth and grow assets over the years beyond what they earn in ordinary income from a job. Although taxes aren’t automatically withheld from this income the way they are from wages, they are still due.
Taxes on the growth of one’s investments — called gains — are generally taxed differently than ordinary income. Determining how much is owed on these gains depends on a number of factors including how long the asset was owned, how much the taxpayer earns in taxable income, and the type of asset it is.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
What Is Free Cash Flow?
Free cash flow shows how much money a company has at its disposal after all costs, including capital spending, to maintain business operations. Find out more here.
What Is Tax-Efficient Investing & Why Is It Important?
Tax-efficient investing is an approach to investing in which you endeavor to minimize or spread out your tax burden.
What Is the Standard Deduction & How Do You Calculate It?
Most taxpayers qualify for the standard deduction if they prefer to use it over itemized deductions. The amount that can be claimed depends on the person’s filing status.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at email@example.com. 508 LaGuardia Place NY, NY 10012.