Capital Gains Tax Rates: Here’s What You Need To Know in 2020

Capital Gains Tax StampCapital gains are the profit you make when you sell a capital asset for more money than its cost to you. When you sell a capital asset, such as real estate, furniture, precious metals, vehicles, collectibles or major equipment, you have a capital gain that is subject to tax.

You can avoid paying capital gains taxes on some assets. If you can’t completely avoid the taxes, there are ways to minimize the amount of taxes you pay.

What Is the Capital Gains Tax for 2020?

The capital gains tax rate for 2020 ranges from 0% to 28%. For most people, the capital gains tax does not exceed 15%. This 15% rate applies to individuals and couples who earn at least $78,750 and whose income does not exceed $434,550 for single filers or $488,850 for married filers who file jointly.

Under a few exceptions, capital gains are taxed at a greater rate. Individuals and couples with an income that exceeds the limits of the 15% tax rate are subject to a 20% tax rate. The maximum 28% tax rate applies to these capital assets:

  • Taxable part of a gain resulting from the sale of a Section 1202 qualified small business stock
  • Net capital gains from the sale of collectibles like coins or art

Any unrecaptured gain from the sale of Section 1250 real property is taxed at a maximum 25% rate. Short-term capital gains are taxed as ordinary income according to the taxpayer’s tax bracket.

Do Capital Gains Count as Income?

Capital gains are included in your taxable income, but they are not part of your ordinary income. This is an important distinction because capital gains and ordinary income are taxed at different rates.

Capital gains can increase your adjusted gross income, which can phase you out of itemized deductions, tax credits, Roth IRA eligibility and IRA contribution deductions. However, they do not push you into a higher tax bracket because they are taxed before your ordinary income.

In Practice

Say, for example, that you and your spouse file jointly and earned $150,000 in 2019. During this period, you also sold a rental property and have a capital gain of $50,000. In this example, the capital gain is taxed at a 15% rate. Then your income is taxed at a maximum rate of 24%.

How To Calculate Your Capital Gains

Curious to see what you might owe on capital gains? Follow these steps to calculate your net capital gain or net capital loss:

Steps To Calculate Capital Gains

  1. Gather the following information:
    • Date you acquired the asset
    • Date you sold the asset
    • The proceeds from the sale of the asset
    • The asset’s basis (the cost of the asset to you)
  2. Sort the assets into two categories: short-term and long-term.
  3. Subtract each asset’s cost from the amount you sold it for.
    • If you made a profit, you have a net gain and will pay taxes on that income.
    • If you sell the asset for less than what you purchased it for, you have a net loss. In some cases, you can deduct the loss.
  4. Record your losses and gains on IRS Form 8949: Sales and Other Dispositions of Capital Assets.

Each person’s tax situation is different, and there are many factors to consider. For this reason, you should speak to a tax professional or financial advisor who can explain your options and help you determine the best solution for your personal needs.

What Is a Short-Term Capital Gains Tax?

You experience a short-term capital gain when you acquire a capital asset and sell it for a profit before you’ve owned it for one year. This is considered ordinary income, and the gain is taxed based on your traditional tax bracket.

The ordinary tax rates for 2019 taxable income filed in 2020 are listed below. If you’ve already received an extension and will be filing late, this information is useful.

Ordinary Tax Rates for 2019 Taxable Income Filed in 2020
Filing Status Income Bracket Tax Rate
Single $0 to $9,699 10%
$9,700 to $39,474 12%
$39,475 to $84,199 22%
$84,200 to $160,724 24%
$160,725 to $204,099 32%
$204,100 to $510,299 35%
$510,300 or greater 37%
Head of Household

$0 to $13,849 10%
$13,850 to $52,849 12%
$52,850 to $84,199 22%
$84,200 to $160,724 24%
$160,725 to $204,099 32%
$204,100 to $510,299 35%
$510,300 or greater 37%
Married Filing Jointly

$0 to $19,399 10%
$19,400 to $78,949 12%
$78,950 to $168,399 22%
$168,400 to $321,449 24%
$321,450 to $408,199 32%
$408,200 to $612,349 35%
$612,350 or greater 37%
Married Filing Separately

$0 to $13,849 10%
$13,850 to $52,849 12%
$52,850 to $84,199 22%
$84,200 to $160,724 24%
$160,725 to $204,099 32%
$204,100 to $306,174 35%
$306,175 or greater 37%

In Practice

If you buy a collectible car for $10,000 in March and sell it for $15,000 in September, you have a capital gain of $5,000. Because you owned the car for only six months, it is a short-term capital gain. You have to pay the short-term capital gains tax, which is the same as your regular income tax rate.

What Is a Long-Term Capital Gains Tax?

If you own a capital asset for at least one year and then sell it for a profit, you have a capital gain. Long-term capital gains are taxed a lower rate than short-term gains.

The long-term capital gains tax rate depends on your taxable income. If you’ve already received an extension and will be filing late, you should be aware of this information.

Long-Term Capital Gains Tax Rates for 2019 Taxable Income Filed in 2020
Filing Status Income Bracket Tax Rate
Single $0 to $78,749 0%
$78,750 to $434,549 15%
$434,550 or more 20%
Head of Household $0 to $78,749 0%
$78,750 to $461,699 15%
$461,700 or more 20%
Married Filing Jointly $0 to $78,749 0%
$78,750 to $488,849 15%
$488,850 or more 20%
Married Filing Separately $0 to $78,749 0%
$78,750 to $244,424 15%
$244,425 or more 20%

As an example, if you purchased a vintage dining set in 2010 for $500 and sold it in 2019 for $2,500, you have a capital gain of $2,000. If you bought that same table in 2019 and sold it the same year, you’d be taxed at the higher short-term capital gains rate.

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Can Taxes on Capital Gains Be Avoided?

It may not be possible to avoid paying capital gains taxes indefinitely, but there are ways to minimize the tax cost.

Hold On to Assets

The first step is to hold on to assets long enough to make them long-term capital assets, which have a lower tax rate than short-term assets.

Rebalance With Dividends

Periodically rebalancing your portfolio is necessary because market conditions and your needs both change over time. However, selling appreciated investments produces capital gains. You can rebalance by cashing out instead of reinvesting the dividends. Then use the cash to invest in other products.

Consider a Robo-Advisor

A robo-advisor, or automated brokerage account, also can help you mitigate capital gains taxes. You can set your account preferences to automatically rebalance the portfolio and implement tax-harvesting to reduce the amount of your capital gains on the account.

Carry Losses Over

You can offset gains by carrying losses over. By doing so, you can get rid of unwanted or unneeded assets and reinvest them in similar products. When using this method, consider focusing on short-term capital gains that are taxed at a higher rate.

This article has been updated with additional reporting since its original publication.

This article originally appeared on Capital Gains Tax Rates: Here’s What You Need To Know in 2020

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