How To Manage Capital Gains Taxes

Classic investments, like stocks, are not the only investments taxed by capital gains. Capital gains taxes can apply to any other property that acquires value over time. These taxes are calculated by subtracting the cost of the investment from the final selling price of said investment. This final amount is reported as capital gains. But, the final amount can be taxed at different rates depending on the investment type and the total monetary gain.

Below, we’re reviewing how capital gains taxes are determined and what methods you can use to reduce them.

Capital Gains Tax Rates

The total tax amount will depend on a variety of factors, though the IRS taxes most individuals at a rate of zero to 15 percent.

Here are a few factors that determine capital gains tax rates:¹

A capital gains rate of 0% applies if your taxable income is less than or equal to:
• $44,625 for single and married filing separately;
• $89,250 for married filing jointly and qualifying surviving spouse; and
• $59,750 for head of household.

A capital gains rate of 15% applies if your taxable income is:

• more than $44,625 but less than or equal to $492,300 for single;
• more than $44,625 but less than or equal to $276,900 for married filing separately;
• more than $89,250 but less than or equal to $553,850 for married filing jointly and qualifying surviving spouse; and
• more than $59,750 but less than or equal to $523,050 for head of household.

However, a capital gains rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

There are a few other exceptions where capital gains may be taxed at rates greater than 20%:

1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.

Make sure to check with the IRS to understand how different investments are taxed. 

Duration of the Investment

The amount of time you hold an investment can reduce the amount of taxes you ultimately pay. The IRS has established two investment types: short-term and long-term. Investment duration is calculated from the date of purchase to the date of sale. Over a year is considered long-term, while short-term is under a year.¹ 

What Isn’t Affected by Capital Gains? 

Certain types of property and accounts are not affected by capital gains taxes. If applicable, see if you can utilize these property and account types to maximize your investments.

Two general property types are unaffected by capital gains. The first is business property, including products. The second is anything you create as an individual. This could be a book you wrote or an invention you patented. 

Alternatively, specific retirement and education accounts, such as a Roth IRA, can help protect your investments from capital gains taxes. 

Offsetting Capital Gains

Investments may not always pay off. Sometimes, a market change results in your property going down in value. This reduction is also calculated on your taxes and is calculated into your capital gains taxes. This can lower your taxable income range.

For example, if you receive $100,000 from selling one investment, you would be taxed in the 15 percent range. However, if you lost $25,000 on another investment, this would drop your total income from investments to $75,000, which could place you beneath the 15 percent tax range. These reductions and gains can only be combined if they are the same type of investment, long-term or short-term and are sold in the same year.²

Like-Kind Exchanges

Capital gains taxes can be postponed by using the income to invest in a similar property type.³ However, make sure to consult the IRS website or your tax professional before moving forward on any like-kind exchange, as the requirements and investment types have changed over the years.

Make sure you prepare to protect your investments from higher tax rates. And when selling an investment or even a piece of property, make sure to consult a financial advisor or IRS representative to help determine how much you could be taxed.

1. https://www.irs.gov/taxtopics/tc409
2. https://www.investopedia.com/terms/c/capitalloss.asp
3. https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips