How are capital gains taxed, and what are the differences between short-term and long-term capital gains?

U.S. Capital Gains Tax Rates for Short-Term vs. Long-Term

Short-Term Capital Gains Tax Rates

Short-term capital gains are taxed as ordinary income. Therefore, the tax rates for short-term capital gains are the same as the regular income tax brackets which can range from 10% to 37% depending on the taxpayer's total taxable income.

Long-Term Capital Gains Tax Rates

Long-term capital gains are taxed at reduced rates depending on the taxpayer's taxable income. For the tax year 2023, the long-term capital gains tax rates are as follows:

- 0% Rate

 - Single and Married Filing Separately: Up to $44,625

 - Married Filing Jointly and Qualifying Surviving Spouse: Up to $89,250

 - Head of Household: Up to $59,750

- 15% Rate

 - Single: Over $44,625 but not over $492,300

 - Married Filing Separately: Over $44,625 but not over $276,900

 - Married Filing Jointly and Qualifying Surviving Spouse: Over $89,250 but not over $553,850

 - Head of Household: Over $59,750 but not over $523,050

- 20% Rate

 - Applies to taxable income exceeding the thresholds set for the 15% capital gain rate.

Special Situations

- Gains from selling section 1202 qualified small business stock are taxed at a maximum rate of 28%.

- The net investment income tax (NIIT) may also apply, which is an additional 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income over certain thresholds.

Additional Information

- The holding period is crucial in determining whether a capital gain is short-term or long-term. Assets held for one year or less are subject to short-term rates, while assets held for more than one year are subject to long-term rates.

Conclusion

The tax rates for short-term capital gains align with ordinary income tax rates, while long-term capital gains benefit from reduced tax rates based on the taxpayer's income level. It is important for taxpayers to understand these distinctions when reporting capital gains on their tax returns.

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Sources:

Topic no. 409, Capital gains and losses | Internal Revenue Service 2024-08-04

Frequently Asked Questions on Virtual Currency Transactions 2024-08-03

Digital assets | Internal Revenue Service 2024-08-02

Foreign tax credit compliance tips | Internal Revenue Service 2024-08-01

SOI Tax Stats - Individual Statistical Tables by Size of Adjusted Gross ... 2024-08-03

The taxation of capital gains of nonresident students, scholars and ... 2024-08-01

Publication 544 (2023), Sales and Other Dispositions of Assets 2024-07-30

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