Understanding capital gains tax: a comprehensive guide
If you’re planning on selling off assets, you need to know about capital gains tax. Learn what it is, how it works, and how to reduce your tax bill.
Summary
Profits on the sale of assets like property, vehicles, stocks, and bonds are subject to capital gains tax.
Short-term capital gains tax applies to assets sold after less than a year of ownership.
Long-term capital gains tax applies if assets are sold after more than one year of ownership.
There are ways to reduce your capital gains tax bill; a financial advisor is best placed to help you navigate through these strategies and ensure you’re not paying too much tax.
What is capital gains tax?
Capital gains tax (CGT) ensures that profits from the sale of an asset are viewed as taxable income. Individuals have a liability to report these profits and meet their payment obligations to the IRS.
Assets that are subject to capital gains tax may include physical items such as vehicles, works of art, jewelry, and real estate. Intangible assets such as stocks, bonds, and even cryptocurrency also count as capital assets.
What are the 2024 Capital Gains Tax rates?
Profits on the sale of items held for less than one year are taxed in accordance with your federal income tax bracket.
Profits on assets held for over a year (long-term capital gains) are taxed according to the table below.
Long-term federal capital gains tax rates 2024/2025
| Tax filing status | Overall taxable capital gains income | Overall taxable capital gains income | Overall taxable capital gains income |
|---|---|---|---|
| Tax filing status | Overall taxable capital gains income | Overall taxable capital gains income | Overall taxable capital gains income |
| Single | ≤ $47,025* | > $47,025 but ≤ $518,900 | > $518,900 |
| Married filing separately | ≤ $47,025. | > $47,025 but ≤ $291,850 | > $291,850 |
| Married filing jointly/ qualifying surviving spouse | ≤ $94,050 | > $94,050 but ≤ $583,750 | > $583,750 |
| Head of household | ≤ $63,000 | > $63,000 but ≤ $551,350 | > $551,350 |
| Applicable tax rate: | 0% | 15% | 20% (to the extent that income exceeds 15% threshold) |
Source: Internal Revenue Service, "Revenue Procedure 2023-34” *Table key: ≤: Less than or equal to >: More than
How does capital gains tax work?
Much like income tax, long-term capital gains tax is charged based on a graduated (sliding) scale but is subject to certain additional considerations:
The holding period refers to the time between acquiring an asset and selling it. Assets held for less than one year are subject to short-term capital gains tax, while long-term capital gains tax applies to assets held for a year or more.
Your taxable income
Your marital and filing status
The type of asset
How much is capital gains tax on inherited property?
You do not owe capital gains tax at the time of inheritance.
You are only liable for capital gains tax on an inherited property if and when you decide to sell it.
At this point, you will pay capital gains tax on your profits from the sale.
How do I determine my capital gains tax rates?
The basic capital gains calculation is as follows:
Capital gains = Realized amount (what you are paid for an asset) – Basis value of asset (what you paid for it)
You can consult the table above to determine your capital gains tax rate based on your total.
Or make things easier, you can also use a capital gains tax calculator.
The calculator will show you your estimated bill for both short-and long-term capital gains tax.
State-specific capital gains tax: how do states differ?
The capital gains tax discussed refers to federal taxation.
In most US states, an additional capital gains tax rate (between 2.9% and 13.3%) applies.
While certain states tax capital gains as an ordinary income, others do so at a lower than ordinary rate and/or apply certain exemptions.
In some states, like Florida, capital gains taxes are 0%.
How can I reduce my capital gains tax bill?
To a certain extent, you can avoid capital gains tax.
Some of your options include the following:
Hold on to your capital assets for at least a year, as long-term capital gains taxes tend to be lower than taxes on short-term capital gains.
Use tax-advantaged investment accounts like 529 plans, 401(k) plans, and individual retirement accounts.
Rebalance your dividends by placing that money into other underperforming accounts rather than reinvesting them into the same investment that paid them.
Apply for exclusions to capital gains from the sale of your primary residence. (Note that certain conditions apply.)
Carry additional capital losses (over and above your allowed deductions for one year) over into the next tax year.
Seek the assistance of a financial advisor to help you manage your capital gains taxes.
Get expert financial advice
Knowing about capital gains tax and how it applies to the profit you make from selling your assets is essential to ensuring that you don’t pay any more tax than you have to.
If you want to learn more about capital gains tax and get expert financial advice to minimize your contributions, let Unbiased match you with a financial advisor who understands your needs.
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