Tax Tips

What Is Capital Gains Tax?

5 Minutes
February 28, 2022

So, what’s all the hype about capital gains tax?

Well for long-term capital gains, the tax rates are taxed in lower brackets than the regular income tax rates.

Lower tax brackets equal less taxes due. This is why people love capital gains tax.

WHAT’S THE DIFFERENCE?

Let’s just let the tax brackets speak for themselves.

Regular Income Tax Bracket (2021):

Regular Income Tax Rate	Taxable Income, Single	Taxable Income, Married Filing Separately	Taxable Income, Head of Household	Taxable Income, Married Filing Jointly
10%	$0 to $9,950	$0 to $9,950	$0 to $14,200	$0 to $19,900
12%	$9,951 to $40,525	$9,951 to $40,525	$14,201 to $54,200	$19,901 to $81,050
22%	$40,526 to $86,375	$40,526 to $86,375	$54,201 to $86,350	$81,051 to $172,750
24%	$86,376 to $164,925	$86,376 to $164,925	$86,351 to $164,900	$172,751 to $329,850
32%	$164,926 to $209,425	$164,926 to $209,425	$164,901 to $209,400	$329,851 to $418,850
35%	$209,426 to $523,600	$209,426 to $314,150	$209,401 to $523,600	$418,851 to $628,300
37%	$523,601 or more	$314,151 or more	$523,601 or more	$628,301 or more

Long-Term Capital Gain Tax Bracket (2021):

Capital Gains Tax Rate	Taxable Income, Single	Taxable Income, Married Filing Separately	Taxable Income, Head of Household	Taxable Income, Married Filing Jointly
0%	Up to $40,400	Up to $40,400	Up to $54,100	Up to $80,800
15%	$40,401 to $445,850	$40,401 to $250,800	$54,101 to $473,750	$80,801 to $501,600
20%	$445,851 or more	$250,801 or more	$473,751 or more	$501,601 or more

*Capital gains from selling collectibles (such as stamps, coins, or art) are taxed at a maximum 28% rate.

SHORT-TERM VS. LONG-TERM

You’re probably wondering why I’m specifying long-term capital gains… Here’s why –

Short-term capital gains are taxed at the regular income tax rate, so in order to take advantage of the capital gains rates, you must have a long-term capital gain.

Short-term is when you own the asset for a year or less.

Long-term is when you own the asset for longer than one year.

Which means, from a tax perspective it’s best to hold on to your investments for more than a year.

WHEN DO YOU PAY CAPITAL GAINS TAX?

Capital gains tax is only due once you sell the asset.

Basically, everything you own whether it is for personal, or investment use is a capital asset. And capital gains tax is the fee you pay on the net profit from the sale of the asset.

This means, even if you aren’t an investment trader on the stock market, capital gains tax may still apply to you at some point in your life.

EXAMPLES OF CAPITAL GAINS TAX

Let’s say you buy a share of stock for $100 on January 1^st, 2021.

For the next year, you see the share of your stock growing and growing, and now by February 2022, your stock is worth $300.

You decide to sell your stock with a net gain of $200.

Gross Profit	$300
Cost Basis	($100)
Net Gain	$200

Since you sold your stock, you will now pay capital gains tax on that net gain.

In this example, your taxable income is $56,000 and you are filing as single.

So, to get your capital gains tax due, you would take the $200 times 15% which equals $30.

This same calculation applies to all capital assets. You subtract the cost basis from the gross profit received on the sale of the asset. Then take the net gain times your appropriate tax rate.

Here is a list of examples of capital assets:

Stocks and bonds
A home owned and occupied by you and your family
Household furnishings
A car used for pleasure or commuting
Coin or stamp collections
Gems and jewelry
Gold, silver, and other metals
Timber grown on your property or investment property

Here are a couple examples of noncapital assets:

Assets (stocks, inventory, real property, depreciable property, accounts receivable) used in your trade or business
A patent, invention, model or design, a secret formula or process; a copyright, a literary, musical, or artistic composition; a letter; a memorandum; or similar property such as drafts of speeches, recordings, transcriptions, manuscriptions, drawings, photographs.

Being aware of the tax regulations on capital gains can help you get the maximum tax savings on your capital asset sales. Always consult with your tax professional to make sure you are making the right decision for your individual situation. Follow along this tax season for more tax tips!