Taxation of Long-Term Capital Gains

By Britt Erica Tunick

While many people saw their finances hit hard since the arrival of COVID-19, others took advantage of market dips that occurred early on in the pandemic and jumped into the stock market. If you are among the many first-time investors who waded into equities and experienced financial gains because of it, or if you took advantage of the housing boon and sold a piece of real estate or made a financial profit from any other type of sale over the past year, including cryptocurrencies, male sure you don’t forget about capital gains taxes!

Capital gains taxes are levied at the time an investment is sold and the seller realizes a financial gain. The tax applies to the increase in value an investment gains from what was initially paid for it. Capital gains taxes do not need to be paid on investments you still hold, regardless of how much they may have appreciated since you first acquired them.

There are two types of capital gains taxes, and the difference between them is important. Short-term capital gains taxes must be paid on the sale of any investment or asset that you have owned for less than a year, and the financial gain you realize from your sale is taxed as ordinary income. Long-term capital gains taxes, however, apply to anything held for at least a year and one day. The rate you pay can range from 0% to 15% to 20%, and is determined by the overall tax bracket you fall into during the year that you sold your assets. Other factors that can play into how much you will need to pay in capital gains taxes include whether you have any carryover capital losses that you can offset the gains against, and any fees or expenses you incurred for an asset during the time that you owned it, since the gains are based on your adjusted basis in the property, not just your cost.

Note that these rules do not apply to assets held in tax-advantaged retirement accounts, which do not incur any taxes when assets are sold, but are taxed at ordinary income rates when funds are withdrawn.

Property acquired by gift or inheritance has different basis rules, and may depend on the adjusted basis of the donor, or the fair market value at the date of death. And don’t forget the state taxes you may need to pay on top of your federal capital gains taxes as well. Because of the differing tax laws among states, you should look into how capital gains are handled where you reside.

There are also special rules on the capital gains taxation of assets you hold for investment, such as real estate, antiques, and art. If you have sold an investment real estate property, the capital gains tax rate is 25% on any portion of your gains that you depreciated on your taxes over the years. In the case of art, antiques and certain other collectibles, the capital gains tax rate is 28% but, again, exceptions exist where you may be able to lower that rate. If you have sold your primary residence, and can satisfy certain rules on ownership and use, you may be able to exclude up to $250,000 of the capital gains from income for a single filer, and up to $500,000 for joint filers.

After you have offset your capital gains against any capital losses you may have, including ones carried over from past years, you can further reduce your tax burden by offsetting the capital gains against up to $3,000 per year of ordinary income for married filing jointly and single taxpayers, and up to $1,500 per year of ordinary income for married filing separate taxpayers.

If your financial situation and your taxes are complicated, your best bet is to hire an experienced certified public accountant to help determine where you stand on the capital gains tax front.