What’s the Capital Gains Tax Rate for Individuals in 2020?

Mohit Oberoi, CFA - Author

Aug. 28 2020, Updated 8:52 a.m. ET

In 1789, Benjamin Franklin famously said, “In this world, nothing can be said to be certain, except death and taxes." Broadly, taxes can be divided into two main categories, direct and indirect. Direct taxes are the taxes that you pay directly to the authorities. Direct taxes are generally linked to your earnings. Capital gains are a form of direct tax and are the profit on the sale of an asset—movable or immovable. So, what’s the capital gains tax rate for individuals in 2020?

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Capital gains tax rate in 2020

Capital gains can be either long term or short term. In most cases, the short-term capital gains tax applies if the asset was held for less than one year. If you hold the asset for over a year, it's eligible for long-term capital gains tax, which is lower than short-term capital gain tax.

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If capital gains are taxed as short-term capital gains, they are added to your marginal income and you pay taxes accordingly. Looking at the current tax system in the U.S. for the filing deadline of April 15, 2021, the tax rates for single individuals is a minimum of 10 percent if your total taxable income is below $9,875. The rate rises progressively and the highest marginal tax rate right now is 37 percent.

Capital gains tax brackets

The current tax brackets for long-term capital gains tax in the U.S are 0 percent, 15 percent, and 20 percent for most assets. If you are a single filer, the long-term capital gains tax rate is 0 percent for income below $40,000, 15 percent for income between $40,001 and $441,450, and 20 percent if your income is above $441,450. 

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Capital gains on stocks versus real estate

The capital gains on stocks are similar to what we discussed above. You pay long-term capital gains of 0 percent, 15 percent, or 20 percent based on your total income. However, taxation is different if you sell your principal residence. In that case, you can exclude $250,000 from the capital gains if you are single and $50,000 if you are married and file taxes jointly.

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However, to claim these exclusions you have to meet certain conditions. For instance, you should live in the house for at least two years in the five-year period before selling. Also, you shouldn't have availed of the exclusion on another home in the last two years. Also, in the preceding five years, you shouldn’t have brought the house in the 1031 exchange where you swap properties.

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Dividend taxation

Dividend taxation depends on whether the IRS classifies them as qualified or unqualified. If the dividend is unqualified, it would simply be added to your income. However, if the dividend is qualified, it would be eligible for capital gains tax and you would pay the tax based on the applicable tax rates.

Several U.S. companies have slashed dividends this year to lower their cash outflow. The pace of dividend cuts this year is the worst since 2009. However, many tech companies have increased their dividends. For the first time, two tech companies, Apple and Microsoft, have joined the league of top 10 dividend payers globally 

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dividends and retirement
Source: istoc

You can choose from a basket of high dividend-paying companies. By investing in stable companies with good dividend yields, you can live off your dividends in your retirement. However, for that to happen, you should start the process of creating a nest egg for your retirement.

Correction: An earlier version of this article used tax rates from 2019 instead of the current tax rate.


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