Capital gains taxes are imposed on the profits that you make after selling certain types of assets, like land, businesses or securities like stocks.

Most capital gains are taxable income, although the amount of taxes that you pay may depend on different factors, especially your income and the length of time you owned the asset before selling it.

In 2019 and 2020, there are capital gains rates of 0%, 15% and 20% for different assets that you owned for a year or more before selling them.

On the other hand, if you held the assets for less than a year, the tax brackets on capital gains vary from 10% to 37%, based on the amount of money involved.

Keep in mind that there are specific exceptions for capital gains taxes that can lead to higher or lower taxes, depending on the type of asset you are selling. You could face higher rates for some assets, but most people may not need to pay capital gains taxes on the proceeds from the sale of their primary residential home.

Understanding Short-Term Capital Gains Taxes

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If you held a particular asset for one year or less, the profits on the sale will be subject to short-term capital gains taxes.

For the 2019 tax year, this tax rate is equal to the income tax rate you would normally pay. In essence, short-term capital gains are treated as just another type of income to be handled on your taxes, although it needs to be specified and reported separately.

Long-Term Capital Gains Taxes

On the other hand, if you held onto the asset for a longer time before selling it, you could see a tax advantage. Long-term capital gains taxes are imposed on the profits you make for selling an asset that you had for over a year.

Depending on your income, filing status and overall tax bracket, you could pay 0%, 15% or 20% in long-term capital gains taxes.

In general, you will pay less in long-term capital gains taxes than you would in short-term taxes.

Capital Gains Taxes for the 2019 Tax Year

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The amount of capital gains taxes that you pay is based on your income. The following are long-term capital gains tax rates for the 2019 tax year; remember, short-term capital gains are taxed alongside your regular income at your typical tax rate. To determine the proper tax rate, make sure to include your capital gains when assessing your income for the tax year.

Single taxpayers

For single taxpayers, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $39,375, you will pay a 0% rate
  • Between $39,376 to $434,550, you will pay a 15% tax rate
  • $434,551 or more, you will pay a 20% tax rate

Married taxpayers filing jointly

For married taxpayers filing jointly, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $78,750, you will pay a 0% tax rate
  • Between $78,751 to $488,850, you will pay a 15% tax rate
  • $488,851 or more, you will pay a 20% tax rate

Head of household

For head of household taxpayers, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $52,750, you will pay a 0% tax rate
  • Between $52,751 to $461,700, you will pay a 15% tax rate
  • $461,701 or higher, you will pay a 20% tax rate

Married taxpayers filing separately

For married taxpayers filing separately, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $39,375, you will pay a 0% tax rate
  • Between $39,376 to $244,425, you will pay a 15% tax rate
  • $244,426 or more, you will pay a 20% tax rate

Capital Gains Taxes for the 2020 Tax Year

Long-term capital gains taxation rates will change somewhat for the 2020 tax year, as noted below.

Single taxpayers

For single taxpayers, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $40,000, you will pay a 0% rate
  • Between $40,001 to $441,450, you will pay a 15% tax rate
  • $441,451 or more, you will pay a 20% tax rate

Married taxpayers filing jointly

For married taxpayers filing jointly, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $80,000, you will pay a 0% rate
  • Between $80,001 to $496,600, you will pay a 15% tax rate
  • $496,601 or more, you will pay a 20% tax rate

Head of household

For head of household taxpayers, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $53,600, you will pay a 0% rate
  • Between $53,601 to $469,050, you will pay a 15% tax rate
  • $469,051 or more, you will pay a 20% tax rate

Married taxpayers filing separately

For married taxpayers filing separately, your income rates will fall among the following, depending on your income level. If your income is:

  • At or below $40,000, you will pay a 0% rate
  • Between $40,001 to $248,300, you will pay a 15% tax rate
  • $248,301 or more, you will pay a 20% tax rate

Capital Gains and Capital Losses

Capital gains taxes can apply to profits made from selling assets like:

  • Real estate
  • Cars
  • Boats
  • Securities like stocks and bonds
  • Other assets

Of course, while you may make money selling off an asset, you could also lose money as well. Investors may sell off poorly performing stocks, for example, for a capital loss. These capital losses on investments can offset your gains because you are taxed on your net capital gains for the year.

For example, if you made a profit of $15,000 from selling some bonds but also lost $7,000 on selling a poorly performing stock, you would be taxed on capital gains of $8,000.

If you had more capital losses than gains over the course of the tax year, you could even receive a tax deduction. You can deduct up to $3,000 for net capital losses over the course of a tax year, although this amount is reduced to $1,500 for married people filing separately.

Exceptions for Capital Gains Taxes and Investment Income

While these are the standard rates for capital gains, there are some exceptions to the rule. There are some types of assets for which it may be beneficial to actually sell them off more quickly.

Collectible assets include

  • Fine art
  • Precious metals
  • Antiques
  • Coin collections

While short-term capital gains on these items are taxed at your regular tax bracket rate, there is a 28% long-term tax on capital gains for profits made by selling these items.

In addition, you may also owe a net investment income tax if your overall income exceeds a certain amount.

  • If you are single or the head of household, this amount is $200,000
  • If you are married, filing jointly, the amount is $250,000
  • If you are married, filing separately, the amount is $125,000

If you profited from investments with an income above this threshold, you may need to pay a 3.8% tax on the smaller of either your net income from investments or the amount by which your total income exceeds this threshold.

On the positive side, you may not need to pay capital gains taxes if you sell your primary residential home. If you sell real estate that you used as your main residence for at least two of the past five years, you can exclude profits of up to $250,000 as a single person or $500,000 as a married person filing jointly from capital gains taxation.

Remember, capital gains taxes are based on profits, not on the overall sale price. However, you must not have excluded another home from capital gains taxation in the previous two years to be eligible.

Reducing Your Capital Gains Tax Burden

There are several ways that you can minimize your capital gains tax obligations. Here are some tips to keep in mind:

  • Keep your assets for a longer time, if possible. In most cases, you’ll pay significantly less if you keep the asset for more than a year before selling it off.
  • You can carry over your capital losses. Since you can only deduct $3,000 in net capital losses each year, you could carry over the excess to the next year to reduce your burden.
  • Make use of tax-advantaged savings plans, like 401(k)s, college savings account (529 plans) or IRAs. If you sell investments inside these accounts and keep the profits there, you don’t have to pay capital gains taxes on the income, which can be especially valuable for Roth IRAs or 529 plans.
  • Consider your investment strategy. You may want to handle your dividends differently, invest more in stocks that are performing less vigorously or use algorithms that provide tax management strategies in order to reduce your capital gains taxes.

Many people may find capital gains taxes complex. At Picnic Tax, our online accountants can use their professional skills to make sure your tax returns are correct while reducing your burden as much as possible. You don’t have to rely on software alone; we match you with a skilled online accountant to go through your documents and prepare your tax return, all at a flat rate that you know in advance. Contact us today to find out how we can help you.