{"id":6467,"date":"2024-10-22T22:53:47","date_gmt":"2024-10-22T22:53:47","guid":{"rendered":"https:\/\/finderica.com\/when-do-you-pay-capital-gains-tax-and-how-does-it-work\/"},"modified":"2024-10-22T22:53:47","modified_gmt":"2024-10-22T22:53:47","slug":"when-do-you-pay-capital-gains-tax-and-how-does-it-work","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=6467","title":{"rendered":"When Do You Pay Capital Gains Tax And How Does It Work?"},"content":{"rendered":"\n<div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"lazyload clicker_number\" style=\"position: absolute; height: 1px; width: 100%\" alt=\"ScoreCard Research\" data-count=\"3.227.180.70,3.227.180.70, 172.68.174.9\" src=\"data:image\/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==\"><\/p>\n<p>When you sell an investment for a profit, the Internal Revenue Service wants its cut.<\/p>\n<p>Capital gains are the profits you make when you sell a stock, mutual fund or other taxable asset.<\/p>\n<p>You\u2019ll owe capital gains taxes if that investment increased in value while you owned it. How much you owe depends on a couple factors, including your income and how long you owned the capital asset.<\/p>\n<p>There are several legitimate ways to lower your capital gains tax liability, including investing in a retirement account.<\/p>\n<p>Here\u2019s everything you need to know, including capital gains tax rates and how to calculate what you owe.\n<\/p>\n<h2>What Is Capital Gains Tax?<\/h2>\n<p>Capital gains tax is a tax you pay on the profit made from selling an investment. The tax isn\u2019t due until after you sell.<\/p>\n<p>How much you owe in taxes depends on how long you owned the capital asset.<\/p>\n<ul>\n<li aria-level=\"1\"><b>Short-term capital gains:<\/b> This tax rate applies to investments you sell less than one year after purchasing them.<\/li>\n<li aria-level=\"1\"><b>Long-term capital gains:<\/b> This tax rate applies to investments you sell after owning them for at least one year. The rate is either 0%, 15% or 20%.<\/li>\n<\/ul>\n<p>Capital gains taxes apply to most investment assets, including stocks, bonds, mutual funds, exchange traded funds, real estate, cars and cryptocurrency.<\/p>\n<p>Capital gain taxes are due the same tax year you sell an investment, typically the following calendar year.<\/p>\n<h3>What Is Short-Term Capital Gains Tax?<\/h3>\n<p>The short-term capital gains tax rate is basically your ordinary income tax rate (which is based on your tax bracket.)<\/p>\n<p>Rates range from 10% all the way up to 37% for tax year 2022.<\/p>\n<p>Short-term capital gains tax is a tax on the sale of capital assets owned for one year or less.<\/p>\n<h3>What Is Long-Term Capital Gains Tax?<\/h3>\n<p>The long-term capital gain tax rate is either 0%, 15% or 20%, depending on your taxable income and filing status.<\/p>\n<p>Most people fall into the 15% long-term capital gains rate.<\/p>\n<p>Long-term capital gains are levied on assets sold a year or more after purchase.<\/p>\n<h2>Capital Gains Tax Rates for 2023<\/h2>\n<p>These tax rates apply when filing your income taxes in 2023 on long-term gains. Short-term capital gains are taxed at ordinary income tax rates.<\/p>\n<div id=\"review-list-table\">\n<h4 class=\"review-list-table-title \">Tax Year 2022 Long-Term Capital Gains Tax Rates                    <\/h4>\n<div class=\"table-responsive\">\n<table class=\"table\">\n<thead>\n<tr>\n<th style=\"text-align: left;\">Tax filing status<\/th>\n<th style=\"text-align: left;\">0% tax rate<\/th>\n<th style=\"text-align: left;\">15% tax rate<\/th>\n<th style=\"text-align: left;\">20% tax rate<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td class=\"column_1\" style=\"text-align: left; font-weight: normal;\">Single<\/td>\n<td class=\"column_2\" style=\"text-align: left; font-weight: normal;\">$0 to $41,675<\/td>\n<td class=\"column_3\" style=\"text-align: left; font-weight: normal;\">$41,676 to $459,750<\/td>\n<td class=\"column_4\" style=\"text-align: left; font-weight: normal;\">$459,751 or more<\/td>\n<\/tr>\n<tr>\n<td class=\"column_1\" style=\"text-align: left; font-weight: normal;\">Married, filing jointly<\/td>\n<td class=\"column_2\" style=\"text-align: left; font-weight: normal;\">$0 to $83,350<\/td>\n<td class=\"column_3\" style=\"text-align: left; font-weight: normal;\">$83,351 to $517,200<\/td>\n<td class=\"column_4\" style=\"text-align: left; font-weight: normal;\">$517,201 or more<\/td>\n<\/tr>\n<tr>\n<td class=\"column_1\" style=\"text-align: left; font-weight: normal;\">Married, filing separately <\/td>\n<td class=\"column_2\" style=\"text-align: left; font-weight: normal;\">$0 to $41,675<\/td>\n<td class=\"column_3\" style=\"text-align: left; font-weight: normal;\">$41,676 to $258,600<\/td>\n<td class=\"column_4\" style=\"text-align: left; font-weight: normal;\">$258,601 or more<\/td>\n<\/tr>\n<tr>\n<td class=\"column_1\" style=\"text-align: left; font-weight: normal;\">Head of household<\/td>\n<td class=\"column_2\" style=\"text-align: left; font-weight: normal;\">$0 to $55,800<\/td>\n<td class=\"column_3\" style=\"text-align: left; font-weight: normal;\">$55,801 to $488,500<\/td>\n<td class=\"column_4\" style=\"text-align: left; font-weight: normal;\">$488,501 or more<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n<h3>How Do Capital Gains Tax Work?<\/h3>\n<p>You\u2019ll almost always pay a higher tax rate when you sell short-term investments (those held less than a year) than when you sell long-term investments.<\/p>\n<p>Most people pay no more than 15% on long-term capital gains taxes. That\u2019s usually more favorable than short-term capital gains tax rates, which follow your income tax bracket.<\/p>\n<p>If you don\u2019t sell any stocks, you don\u2019t need to pay capital gains tax \u2014 but you may still have to pay tax on dividends from stocks you own.<\/p>\n<h3>When Do You Pay Capital Gains Taxes?<\/h3>\n<p>You generally owe capital gains tax for the tax year you sell an investment. For example, if you sell a stock in June 2022, you\u2019ll need to report it when you file your 2022 tax return \u2014 by April 2023 or October 2023 if you file an extension.<\/p>\n<p>Remember: Capital gains tax isn\u2019t due until after an investment is sold.<\/p>\n<p>When you sell an investment, it\u2019s called a realized gain or loss. The transaction is complete and you\u2019ve made your profit or taken your loss.<\/p>\n<p>If you haven\u2019t actually sold the capital asset, any investment profits or losses are called unrealized gains\/losses.<\/p>\n<h2>Exceptions to Capital Gains Tax Rules<\/h2>\n<p>Not all assets receive the same capital gains tax treatment.<\/p>\n<p>If you\u2019re selling collectibles or real estate, be aware of these rules. High-income earners also pay a higher tax.<\/p>\n<h3>Collectibles<\/h3>\n<p>Selling collectibles you\u2019ve owned at least one year nets a different tax rate than other capital assets.<\/p>\n<p>Long-term gains on collectibles \u2014 such as fine art, antiques, jewelry and precious metals \u2014 are taxed at a flat 28% rate, regardless of your income.<\/p>\n<p>Short-term gains on collectibles are still taxed at your ordinary income tax rate (i.e., your tax bracket).<\/p>\n<h3>Owner-Occupied Real Estate<\/h3>\n<p>Capital gains taxes are also calculated differently for most homeowners.<\/p>\n<p>The first $250,000 of capital gain is excluded from the sale of a primary residence, so long as you\u2019ve lived there for at least two out of the past five years. Married couples filing jointly can exclude the first $500,000.<\/p>\n<p>To qualify, you must not have excluded another home from capital gains within the last two years.<\/p>\n<h3>Rule for High-Income Earners<\/h3>\n<p>If your income is high enough, you may be subject to another 3.8% tax, known as the net investment income tax.<\/p>\n<p>You\u2019ll owe net investment income tax if your modified adjusted gross income (AGI) exceeds these maximum limits:<\/p>\n<ul>\n<li aria-level=\"1\">Single or head of household: $200,000<\/li>\n<li aria-level=\"1\">Married, filing jointly: $250,000<\/li>\n<li aria-level=\"1\">Married, filing separately: $125,000<\/li>\n<li aria-level=\"1\">Qualifying widow(er) with dependent child: $250,000<\/li>\n<\/ul>\n<h2>How to Calculate Your Capital Gains Tax<\/h2>\n<p>Most people hire a tax professional or use tax software to figure out their capital gains tax bill.<\/p>\n<p>But you can still try to crunch the numbers yourself.<\/p>\n<p>First, separate your short-term gains and losses from your long-term gains and losses. (Short-term losses can offset short-term gains. Long-term losses can offset long-term gains.)<\/p>\n<p>Your short-term gains are taxed at your ordinary income rate while any long-term gains are taxed at the long-term capital gains rate.<\/p>\n<p>The formula is: How much you sold an asset for \u2013 what you paid for it = your capital gain\/loss.<\/p>\n<p>For example, if you bought a stock for $500, then sold it a couple years later for $700, your capital gain is $200.<\/p>\n<p>You\u2019re taxed on the capital gain ($200), not the sale price ($700).<\/p>\n<p>The difference between your capital gains and capital losses is called your net capital gain. If your gains outnumber your losses, you experience a net capital loss.<\/p>\n<h2>4 Ways to Reduce Your Capital Gains Tax<\/h2>\n<p>There are several legitimate ways to reduce your tax liability after selling an investment.<\/p>\n<h3>1. Hold Your Investments for at Least a Year<\/h3>\n<p>If you wait at least one year to sell an investment, you\u2019ll pay lower capital gains tax rates. This doesn\u2019t bode well for day trading, but investing long-term can help reduce your tax bill.<\/p>\n<p>Consider this: Whether you make $50,000 a year or $190,000 a year, you\u2019ll report a 15% capital gains tax rate when you sell a stock owned for at least one year.<\/p>\n<p>However, if you hold the stock for less than a year, you would be taxed at your ordinary income rate. That would be a 22% capital gains tax if your annual income is $50,000 up to a whopping 32% capital gains tax if your annual income is $190,000.<\/p>\n<h3>2. Invest in a Retirement Account<\/h3>\n<p>If you sell a capital asset in a retirement account, you won\u2019t owe taxes until you withdraw the money.<\/p>\n<p>You can open up an individual retirement account (IRA) on your own or open a 401(k) or a similar account \u2014 a 403(b) or a 457 plan \u2014 with your employer.<\/p>\n<p>Once money is in your 401(k) or IRA, and as long as the money stays in the account, you won\u2019t pay taxes on investment gains, interest or dividends.<\/p>\n<p>If you own a Roth retirement account, you won\u2019t owe any taxes when you withdraw money either, as long as you\u2019re at least 59.5 years old.<\/p>\n<h3>3. Offset Capital Gains With Capital Losses<\/h3>\n<p>When you sell a stock or other asset for less than what you paid for it, you experience a capital loss.<\/p>\n<p>You can use capital losses to offset capital gains. If you made a big profit earlier in the year, selling stocks at a loss can reduce or even eliminate how much you owe in capital gains taxes.<\/p>\n<p>This strategy is called tax loss harvesting. Many financial advisors offer this service. It\u2019s also a feature of several robo-advisors, such as <a href=\"https:\/\/www.wealthfront.com\/\" target=\"_blank\" rel=\"noopener\">Wealthfront<\/a>.<\/p>\n<p>If your capital losses are greater than $3,000, you can carry those losses forward indefinitely and deduct them from your capital gains in the future.<\/p>\n<h3>4. Wait to Sell Until Retirement<\/h3>\n<p>If you\u2019re near retirement, it can make sense to wait until your taxable income is lower to sell investments.<\/p>\n<p>A lower income equals a lower capital gains tax rate, especially if you\u2019re looking to cash in short-term investments.<\/p>\n<p>If your income is low enough (less than $41,675 for tax year 2022), you might be able to avoid capital gains taxes on long-term investments entirely.<\/p>\n<p><i>Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The SS.<\/i><\/p>\n<p>        <!-- ACF Financial Disclaimer --><\/p>\n<p>        <!-- End ACF Financial Disclaimer --><\/p>\n<p>        <!-- \n\n<div class=\"single-social-share-bottom text-center\"> --><br \/>\n                    <!-- <\/div>\n\n --><\/p>\n<p>        <!-- Newsletter Signup Form --><\/p>\n<div class=\"newsletter-signup-wrapper-for-digioh\">\n<div class=\"col-xs-12 newsletter-wrap flex-row\">\n<div class=\"container flex-container\">\n<div class=\"col-xs-12 new-newsletter-form\">\n<p class=\"text-subheading\">Ready to stop worrying about money?<\/p>\n<p class=\"text-get-daily\">Get the SS Daily<\/p>\n<p class=\"email-privacy-policy-blurb-white\">\n<\/p><\/div>\n<\/div><\/div>\n<\/p><\/div>\n<p>        <!-- End Newsletter Signup Form --><\/p><\/div>\n<p><script type=\"text\/javascript\" id=\"wp-fcapi-js-before\">\n\/* <![CDATA[ *\/\n!function(f,b,e,v,n,t,s)\n{if(f.fbq)return;n=f.fbq=function(){n.callMethod?\nn.callMethod.apply(n,arguments):n.queue.push(arguments)};\nif(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version='2.0';\nn.queue=[];t=b.createElement(e);t.async=!0;\nt.src=v;s=b.getElementsByTagName(e)[0];\ns.parentNode.insertBefore(t,s)}(window, document,'script',\n'https:\/\/connect.facebook.net\/en_US\/fbevents.js');\nfbq('init', '263664193816679');\n\/* ]]> *\/\n<\/script><br \/>\n<br \/><a href=\"https:\/\/www.thepennyhoarder.com\/investing\/capital-gains-tax\/\" target=\"_blank\" rel=\"noopener\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>When you sell an investment for a profit, the Internal Revenue Service wants its cut. Capital gains are the profits you make when you sell a stock, mutual fund or other taxable asset. You\u2019ll owe capital gains taxes if that investment increased in value while you owned it. How much you owe depends on a<\/p>\n","protected":false},"author":1,"featured_media":6468,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rank_math_lock_modified_date":false,"footnotes":""},"categories":[185],"tags":[1118,113,41,97,360],"class_list":{"0":"post-6467","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investing","8":"tag-capital","9":"tag-gains","10":"tag-pay","11":"tag-tax","12":"tag-work"},"_links":{"self":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/6467","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6467"}],"version-history":[{"count":0,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/6467\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/media\/6468"}],"wp:attachment":[{"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6467"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6467"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6467"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}