Any investment that can be sold for more than its original cost produces what is known as a “capital gain”. These gains are taxed using Federal rates that are different than those used to tax other types of income. Some examples of other income are amounts received as interest, dividends, social security, and occupational wages.
When are Capital Gains taxed at the 0% Rate?
For 2019, the 0% tax rate will apply to those who file as “single” with taxable income up to $39,375 and for married couples filing jointly with taxable income up to $78,750.
When are Capital Gains taxed at the 15% Rate?
For 2019, the 15% tax rate will apply to those who file as “single” with taxable income up to $434,550 and for married couples filing jointly with taxable income up to $488,850.
When are Capital Gains taxed at the 20% Rate?
For 2019, the 20% tax rate will apply to those who file as “single” with taxable income that exceeds $434,550 and for married couples filing jointly with taxable income that exceeds $488,850.
The 3.8% Surtax on “Net Investment Income”
For 2019, an additional 3.8% tax will apply to those who file as “single” with taxable income that exceeds $200,000 and for married couples filing jointly with taxable income that exceeds $250,000. The surtax will cause anyone paying the top 20% rate to be effectively paying 23.8% on capital gains sales.
Rates for Specific Types of Other capital Gains
--Gains on sales of artwork and collectibles are subject to a higher 28% maximum rate.
--Depreciable real estate and small-business stock have rates that are specific to them that are explained in IRS publication 550.
--There are also special exemptions for gains incurred when selling a primary residence.
Other Requirements for Capital Gains Tax Treatment
Capital gains are taxed at a higher rate if the asset that has been sold was held up to one year before the sale. These gains are called “short-term” capital gains. If the asset was held for longer than one year it becomes a “long-term” capital gain that will qualify for one of the lower tax rates between 0% and 20% as outlined above. Short-term capital gains do not qualify for these lower tax rates. Instead, the gains will be taxed at the same rates as ordinary income from wages would be taxed.
Some Strategies to Reduce or Eliminate Capital Gains Taxation
If, and when it is possible, it may be beneficial to either defer or advance income into an earlier or later tax-year in order to minimize both ordinary and capital gains tax rates.
If the capital gain would be from selling shares of highly appreciated stock and other qualifying investments that were held for more than one year, it may be better to consider donating the stock to a qualified charity. This will avoid capital gains taxation on the gain and enable the current market value to be deducted against taxable income on your tax-return.
If there should be a loss instead of a gain from a donated asset that is worth less than its original purchase cost, it should first be sold to create a capital loss that then can be used to offset (reduce) any current and/or future capital gains, while donating the proceeds from the sale to charity.
If there are no current capital gains to offset, capital losses that exceed capital gains can be used as deductions for up to $3,000 yearly from wages and other ordinary income for married couples filing joint tax-returns. The deduction is $1500 each if filing separately.
Any remaining capital losses that are not yet used to offset income can be “carried forward” indefinitely to be used in any future tax year to offset any new capital gains. And conversely, “tax-harvesting” may be desired and accomplished by selling investments that have gains in years with unused capital losses.
Watch out for “Wash Sales”
They are defined as sales that are made at a loss where the same or “substantially the same” investment is purchased within a 30-day period before and after the sale. If so, any loss becomes ineligible to deduct for that tax year. However, the disallowed loss can be added to the “cost basis” of the investment that was purchased.
In summary, capital gains taxation provides lower tax rates for gains from sales of investment assets, which is beneficial for investment funds that do not have the benefit of current tax avoidance found in retirement accounts. The tax implication for buying and selling investments for one’s lifetime savings should be carefully considered as sales are made throughout the year. It is the next most important aspect to consider behind the potential future value of any investment that is being considered for sale or purchase.
Greg Tinaglia
(Last Updated: 07/11/2019)