In the eyes of the IRS, capital gains do count as income, but that doesn’t mean they are necessarily taxed like ordinary income. For example, you can score a lower tax rate for long-term capital gains. Since capital gains taxes vary, here's what you need to know.
What are capital gains?
According to the IRS, capital assets are “everything you own and use for personal or investment services” including real estate, household furnishings, and stocks and bonds used as investments.
Capital gains represent the difference between the money you earned from the sale of a capital asset and the adjusted basis of that same asset—which, in many cases, is the difference between how much you sold the asset for and how much you paid for it. When the difference is negative, it’s referred to as a capital loss.
Capital gains can get complicated when the basis can’t be determined by cost, like with inheritances and gifts, so refer to the IRS’s Publication 551, Basis of Assets for more information.
Do capital gains count as income?
According to the Urban-Brookings Tax Policy Center, capital gains are generally counted as taxable income. In most cases, capital gains are taxed at a lower rate. Short-term capital gains—from assets held for a year or less—are taxed as ordinary income at rates up to 37 percent, while long-term capital gains are taxed up to 20 percent.
Both long-term and short-term capital gains are subject to the 3.8 percent Net Investment Income Tax (NIIT). The IRS stipulates that capital gains tax is applicable for taxpayers with modified adjusted gross income over certain thresholds. The threshold is $125,000 for married taxpayers filing separately, $200,000 for heads of households and single taxpayers, and $250,000 for married taxpayers filing jointly and qualifying widows or widowers.
What’s the capital gains tax rate?
The capital gains tax rates varies by tax filing status and the amount of the gain. Investopedia has breakdowns for each bracket.
For long-term capital gains, single taxpayers are taxed at 0 percent on gains up to $40,000, 15 percent on gains from $40,001 to $441,450, and 20 percent on gains more than $441,450. Heads of households are taxed at 0 percent on gains up to $53,600, 15 percent on gains from $53,601 to $469,050, and 20 percent on gains more than $469,050. Married taxpayers filing jointly are taxed at 0 percent on gains up to $80,000, 15 percent on gains from $80,001 to $496,600, and 20 percent on gains more than $496,601. Married taxpayers filing separately are taxed at 0 percent on gains up to $40,000, 15 percent on gains from $40,001 to $248,300, and 20 percent on gains more than $248,300.
Short-term capital gains tax follows federal income tax brackets. Short-term capital gains are taxed like ordinary income. The brackets are too numerous to list here, but they range from 10 percent to 37 percent.