What are the 2020 and 2021 capital gains tax rates? – Councilor Forbes

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A capital gain is when you sell an investment or asset at a profit. When you realize a capital gain, the proceeds are considered taxable income. The amount you owe for capital gains tax depends in part on how long you own the asset: long-term capital gains come from an asset that you have held for more than ‘one year, and short-term capital gains apply to profits from the sale of an asset that you have held for less than a year.

Long-term capital gains tax

Long-term capital gains are taxed at lower rates than ordinary income, and the amount you owe depends on your annual taxable income. You will need either 0%, 15% or 20% on the gains from the sale of most assets or investments held for more than a year, depending on your annual taxable income (see more on how to calculate your long-term capital gains tax, see below).

When calculating the holding period, or the length of time you held the asset before selling it, you should count the day you sold the asset, but not the day you bought it. For example: if you purchased an asset on February 1, 2019, your holding period began on February 2, 2019 and you would have reached the one-year ownership threshold on February 1, 2020.

What are the long-term capital gains tax rates for 2020?

What are the long-term capital gains tax rates for 2021?

Short-term capital gains tax

If you have held an asset or investment for a year or less before selling it for a gain, it is considered a short-term capital gain. In the United States, short-term capital gains are taxed as ordinary income. This means you could pay up to 37% income tax, depending on your federal tax bracket.

Federal income tax brackets for 2020

Federal income tax brackets for 2021

What is a capital gain?

A capital gain occurs when you sell or trade an asset for a price higher than its base. The “basis” is what you paid for the asset, plus commissions and the cost of improvements, minus depreciation. There is no capital gain until you sell an asset, but once you sell an asset for a gain, you have to deduct it from your income taxes. Capital gains are not adjusted for inflation.

Here’s how capital gains are calculated:

  • Find your base. Typically, this is what you paid for the asset, including any commissions or fees.
  • Find your realized amount. This will be the price you sold the asset for, less any commissions or fees you paid.
  • Subtract the base from the amount realized. If your selling price was higher than your base price, this is a capital gain. If your selling price was lower than your base price, it is considered a capital loss.

What are capital losses?

Capital losses are when you sell an asset or investment for less than you paid for it. Capital losses from investments can be used to offset your capital gains on your taxes. If you sell an RV or your grandma’s silver dishes at a loss, you can’t use the loss to offset capital gains. Like gains, capital losses come in both short and long term forms and must first be used to offset capital gains of the same type.

For example, if you have long-term capital losses, they should first be used to offset long-term capital gains. Any excess loss after that can be used to offset short-term capital gains. You can also use capital losses to offset up to $ 3,000 from other income, such as income or dividend income. Unused capital losses can be carried forward to future tax years.

How are capital gains taxes calculated?

You can calculate capital gains taxes using IRS forms. To calculate and report sales that resulted in capital gains or losses, start with IRS Form 8949. Record each sale and calculate your retention time, base, and gain or loss. Then calculate your net capital gains using Schedule D of IRS Form 1040. Then copy the results from your tax return on Form 1040 to determine your overall tax rate.

Exceptions to Capital Gains Taxes

For certain types of capital gains, different rules apply. These include capital gains from the sale of collectibles (such as art, antiques, and precious metals) and owner-occupied real estate.

Capital gains taxes on owner-occupied real estate

If you sell your house at a profit, this is considered a capital gain. But you may be able to exclude up to $ 250,000 of this gain from your income, or up to $ 500,000 if you and your spouse file a joint income tax return.

To be eligible, you must pass both the Ownership Test and the Use Test. This means that you must have owned and used the property as your primary residence for a total period of at least two years out of the five years preceding the date of sale. The two-year periods for owning and using the home do not have to be the same two-year periods. As a general rule, you cannot take advantage of this exclusion if you used it for another home sale in the two years prior to the sale of that home.

Capital gains tax on collectibles

If you realize long-term capital gains on the sale of collectibles, such as precious metals, coins or art, they are taxed at the maximum rate of 28%. Remember that short-term capital gains on collectible assets are always taxed as ordinary income. The IRS classifies collectible assets as:

  • Works of art, rugs and antiques
  • Musical instruments and historical objects
  • Stamps and coins
  • Alcoholic drinks (think precious old wine)
  • Any metal or gem

This last point bears repeating: the IRS considers precious metals to be collectibles. This means long-term capital gains from the sale of shares in any pass-through investment vehicle that invests in precious metals (such as a exchange traded fund or mutual fund) are generally taxed at the rate of 28%.

What is the tax on net investment income?

For people receiving investment income above certain annual thresholds, the net investment income tax comes into play. Net investment income includes capital gains from the sale of investments that have not been offset by capital losses, as well as dividend and interest income, among other sources. Net investment income tax is an additional 3.8% surtax.

Who is liable for tax on net investment income?

Individuals, estates and trusts with income above specified levels own this tax on their net investment income. If you have net investment income from capital gains and other investment sources, and adjusted gross income above the levels listed below, you will owe tax.

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