Capital Gains Tax Rates to Know for Federal Income Tax Accounting

Understanding capital gains tax rates is crucial for effective tax planning. These rates differ for short-term and long-term gains, impacting how much tax you owe. Knowing these details helps in making informed investment decisions and managing your overall tax liability.

1. Short-term capital gains tax rates (ordinary income rates)

   • Short-term capital gains are taxed as ordinary income, meaning they are subject to the same tax rates as wages or salaries.
   • The tax rate can range from 10% to 37%, depending on the taxpayer's income bracket.
   • Short-term gains apply to assets held for one year or less before being sold.

2. Long-term capital gains tax rates (0%, 15%, 20%)

   • Long-term capital gains are taxed at reduced rates compared to ordinary income, with rates of 0%, 15%, or 20% based on income levels.
   • The 0% rate applies to individuals in the lowest tax brackets, while the 15% rate is for middle-income earners.
   • The 20% rate is applicable to high-income earners, typically those with taxable income exceeding certain thresholds.

3. Net Investment Income Tax (NIIT) rate (3.8%)

   • The NIIT is an additional tax of 3.8% on net investment income for individuals, estates, and trusts.
   • It applies to taxpayers with modified adjusted gross income (MAGI) above $200,000 for single filers and$250,000 for married couples filing jointly.
   • Net investment income includes capital gains, dividends, interest, and rental income.

4. Holding period requirements for long-term capital gains

   • To qualify for long-term capital gains tax rates, an asset must be held for more than one year.
   • The holding period begins the day after the asset is acquired and ends on the day it is sold.
   • Special rules may apply for certain types of assets, such as inherited property, which is automatically considered long-term.

5. Capital gains tax rates for collectibles (28% maximum)

   • Collectibles, such as art, antiques, and coins, are subject to a maximum capital gains tax rate of 28%.
   • This rate applies regardless of the taxpayer's income level.
   • Collectibles held for more than one year are taxed at this higher rate compared to other long-term capital gains.

6. Qualified small business stock exclusion rates

   • Investors may exclude up to 100% of capital gains from the sale of qualified small business stock (QSBS) if held for more than five years.
   • The exclusion applies to gains up to $10 million or 10 times the taxpayer's basis in the stock, whichever is greater.
   • QSBS must meet specific criteria, including being issued by a domestic C corporation and meeting active business requirements.

7. Section 1250 depreciation recapture rate

   • Section 1250 property, typically real estate, is subject to depreciation recapture, which is taxed at a maximum rate of 25%.
   • This applies when the property is sold for more than its depreciated value.
   • The recaptured amount is taxed as ordinary income, while any additional gain is taxed at long-term capital gains rates.

8. Capital gains tax rates for qualified dividends

   • Qualified dividends are taxed at the same reduced rates as long-term capital gains (0%, 15%, or 20%).
   • To qualify, dividends must be paid by U.S. corporations or qualified foreign corporations and meet specific holding period requirements.
   • Non-qualified dividends are taxed at ordinary income tax rates.

9. State-specific capital gains tax rates

   • Many states impose their own capital gains taxes, which can vary significantly from federal rates.
   • Some states tax capital gains as ordinary income, while others may have specific rates for capital gains.
   • Taxpayers should be aware of their state's tax laws, as they can impact overall tax liability.

10. Special rates for certain types of real estate investments

    • Certain real estate investments, such as those held in a Qualified Opportunity Fund, may benefit from tax incentives, including deferral of capital gains.
    • Real estate investment trusts (REITs) may also have specific tax treatments for capital gains.
    • Taxpayers should consider the implications of 1031 exchanges, which allow deferral of capital gains taxes on like-kind property exchanges.