When does capital gains tax apply?
You sold your house or another valuable asset. When should you notify the Internal Revenue Service? We’re here to make sense of the tax laws that can be confusing for many Americans. Below, you’ll learn how capital gains taxes work, when to make estimated tax payments, and how to minimize your tax liability.
At a glance:
If you sell an asset you own for a year or less, the proceeds are taxed like ordinary income.
- If you held the asset for over a year, you’re taxed at long-term capital gain tax rates, which are generally lower.
- You can use other tax events like selling depreciated assets or contributing to charity to offset capital gains tax.
- What are capital gains?
Capital gains refer to the profit you make when you sell a capital asset for more than its purchase price. Capital gains can be made on assets such as real estate, mutual fund, collectibles and cryptocurrency. However, not all capital gains are taxed equally, which is where the concept of long-term capital gains and short-term capital gains comes in.
Short-term capital gains tax rates
If you held an asset for one year or less before selling, the profit is considered a short-term capital gain. These gains are taxed according to your normal income tax rate. This can make them costlier. You can’t remember what tax bracket you are in? Check the 2024 tax brackets here.
Long-term capital gains tax rates
Assets held for more than one year are subject to long-term capital gains tax rates, which are typically lower. Here are the long-term gain rates for tax year 2024:
Tax rate
Single
Married filing jointly | Married filing separately | Head of household | 0% | $0 to $47,025 |
$0 to $94,050 | $0 to $47,025 | $0 to $63,000 | 15% | $47,026 to $518,900 |
$94,051 to $583,750 | $47,026 to $291,850 | $63,001 to $551,350 | 20% | $518,901 or more |
$583,751 or more | $291,851 or more | $551,351 or more | For example, if you’re in the 24% tax bracket ($100,526 to $191,950 in 2024), your long-term capital gains tax rate is likely only 15%, based on the chart above. Some taxpayers in lower tax brackets (10% and 12%) may even have a tax-free rate. This is why holding assets longer can be beneficial from a tax treatment standpoint. | Will I pay additional taxes because of capital gains? |
Before you stress about paying taxes on that house sale or profitable stock trade, you need to determine how much your tax bill will increase — if at all.
How to estimate your capital gains tax
Check out our capital gains tax calculator to estimate your taxable capital gain. It’s important to know the difference between your cost basis and the sale price when selling assets. The difference between these two is your taxable income from the sale.
You can also calculate it based on your tax bracket — try using our income tax calculator to estimate how a sale might affect your overall taxable income.
Special cases: primary home sale and collectibles
The sale of your primary residence may offer an exemption from capital gains taxes. Under certain conditions, homeowners can exclude up to $250,000 of the gain from selling their primary residence as a single filer ($500,000 for married filers filing jointly). On the other hand, selling collectibles like art or vintage cars incurs a higher capital gains tax rate of up to 28%.
Estimated tax payments and capital gains
Why worry about estimated tax payments?
The IRS may require you to make estimated tax payments for any income not subject to withholding. If you have a large capital gain from the sale of a valuable asset, you may be required to pay quarterly tax on that amount. If you fail to pay the tax, you may be charged penalties and interest on the amount that should have been paid. Generally, you must make estimated payments if you expect to owe more than $1,000 when filing your tax return and your withholding is less than 90% of your current year’s tax liability or 100% of your previous year’s taxes.
Alternatives to estimated tax payments
Instead of making quarterly payments, you could adjust your income tax withholding to account for the additional tax. You can increase your withholding by filing a new Form W-4 with your payroll department.
How tax brackets impact your capital gains
Capital gains can push you into a higher tax bracket, but the good news is that not all gains are taxed at the higher rate when this happens. Only the portion that falls under the higher bracket is taxed. You sell a piece of land, which is a capital asset, for $50,000 in capital gains. This puts you in the 22% marginal bracket. You would then pay 0% capital gains tax on any capital gain that falls into the 12% tax bracket. The remaining portion of the capital gain that pushes you into the 22% marginal tax bracket is then subject to a 15% capital gains tax.
The effect of capital gains on adjusted gross income
Selling a valuable capital asset might also increase your adjusted gross income (AGI). This could reduce your tax credits or deductions, affecting your overall tax liability. In some cases, a higher AGI can subject you to additional taxes like the net investment income tax (NIIT) if you’re a high-income taxpayer.
Ways to minimize your capital gains tax
1. Capital losses can be used to offset gains. Capital losses can be used to offset capital gains and reduce the tax you owe. You must first match short-term losses to short-term gain, and the opposite is true for long-term losses and gains. Find ways to lower your taxable income. Find ways to lower your taxable income.
To minimize your taxable income, consider strategies like tax-loss harvesting, contributing to charity, or investing in tax-advantaged accounts like an IRA or another retirement account.
Understanding the IRS rules for capital gains
The IRS tracks all taxable capital gain events, even if you don’t report them. Forms like Form 1099-S for real estate transactions ensure the agency is aware of your sale, so it’s essential to report everything accurately on your tax return.
Be aware the IRS requires extra scrutiny for high-value assets, particularly for complex transactions involving depreciation, wash sales, or the sale of cryptocurrency and other financial instruments like mutual funds.
The bottom line
Understanding how capital gains taxes work can save you from unpleasant surprises at tax time. Knowing how to navigate short-term gains or strategize your long-term tax rates is the best way to reduce your tax liability. And don’t forget: If you need help along the way, TaxAct is here to make tax season less of a headache.
This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.