The landscape · Investing and taxes
Long term versus short term capital gains rates
A gain on an investment held more than one year is taxed at the lower long term rates of 0, 15, or 20 percent, while a gain on something held a year or less is taxed as ordinary income.
Who this exists for. This applies when a person sells an investment outside a retirement account for more than they paid. Ticks that show it: I hold investments outside retirement accounts; I sold a home this year; My employer offers stock or a stock purchase plan.
How it works
The holding period starts the day after purchase and the sale must come more than one year later to be long term. Long term gains are taxed at 0 percent for taxable income up to this year's official ltcg zero rate top single (not yet verified here; see the official source below) for a single filer, 15 percent up to this year's official ltcg fifteen rate top single (not yet verified here; see the official source below), and 20 percent above that, with roughly doubled lines for joint filers, and the gain itself is stacked on top of ordinary income when finding which rate applies. Short term gains are simply added to wages and taxed at the regular brackets. Losses offset gains of the same kind first, then the other kind, and up to this year's official capital loss deduction limit (not yet verified here; see the official source below) of net loss a year can offset ordinary income, with the rest carried forward. The broker reports sales on a form each year with the purchase date and basis.
What it gives
Long term gains can be taxed at 0 percent for a household with modest income.
The top long term rate is far below the top ordinary rate.
Losses can offset gains and carry forward without limit in years.
What it costs, or where the catch is
Selling one day short of a year turns a long term gain into ordinary income.
Larger gains can trigger the net investment income tax on top of the rate.
Mutual funds pass through gains to holders every year even when the holder sells nothing.
A worked example
Imani bought fund shares for $20,000 and sold them 14 months later for $28,000, an $8,000 gain. Her taxable income with the gain is $60,000, inside the 15 percent band, so her tax on the gain is $1,200, since $8,000 times 0.15 is $1,200. Had she sold after 11 months, the $8,000 would have been taxed at her 22 percent ordinary rate, which is $1,760, a difference of $560.
Where it goes wrong
The common miss is selling right before the one year mark, often to catch a price move, and paying the ordinary rate on the whole gain.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS Tax Topic 409, Capital gains and losses. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about Long term versus short term capital gains rates
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- The employee stock purchase plan discount
This exists for a worker whose employer offers an employee stock purchase plan that sells company shares at a discount through payroll.
- I bonds and Treasury bills through TreasuryDirect
This exists for a person holding cash they do not need for a while, who wants to know what the Treasury sells directly to individuals.
- FDIC and NCUA insurance limits and ownership categories
This exists for anyone with money in a bank or credit union, and especially for a person whose balances at one institution are approaching the insured amount.
- Quarterly estimated taxes and the safe harbor
This applies when a person expects to owe at least $1,000 of federal tax beyond what is withheld, which is the usual case for self employed people and those with large investment income.
- The kiddie tax on a child's investment income
This applies when a child under 18, or a full time student under 24, has investment income above a line set each year.
- The home sale exclusion and its ownership and use test
This exists for a person who sells a home they owned and lived in as their main home for at least two of the last five years.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.