What is the Long-term Capital Gains Tax?

If you are on this page reading about long-term capital gains tax, it means the stock you bought has appreciated well enough. The revenue you make when you sell stocks is subject to capital gains tax, which is a specific tax imposed on the sale of an item that has increased in value; long-term capital gains tax.

A capital loss, however, occurs when an asset is sold for less money than it was originally purchased for and if you sell an asset for a profit, depending on how long you’ve had it, you may be subject to a short- or long-term capital gains tax.

When you sell the stock, you will have a realized gain on which you must pay as a long or short-term capital gains tax.

What is a Long-term Capital Gains Tax?

A tax on assets kept for more than a year is known as a long-term capital gains tax. Long-term capital gains tax rates range from 0% to 15% to 20%, depending on your level of income. Typically, these rates are significantly lower than the regular income tax rate.

While capital gain taxes are inconvenient, some of the best assets, such as stocks, allow you to avoid saying them if you don’t sell the position before realizing the gains. As a result, you may hold your investments for decades and pay no taxes on the profits.

How does Capital Gains Taxes Work?

To know how capital gains tax works, we’ll look at the following instance. If you buy $5,000 in stock in May and sell it for $5,000 in December of the same year, you would have gained a $500 short-term capital gain.

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Then, you must pay the IRS $110 of your $500 capital gains if you are in the 22 recent tax rate. That leaves you with a $390 profit.

But, if you hold on to the stock until December of the following year and then sell it, you will have made a long-term capital gain of $700. S, if your total income is $5,000, you’ll be taxed on that long-term capital gain at a rate of 15%. Rather than sending $110, you’ll pay $105 resulting in a net profit of $595.

Long-Term Capital Gains Tax Rates

The tax treatment of long-term capital gains altered after the passing of the Tax Cuts and Jobs Act (TCJA). Prior to 2018, the tax brackets for long-term capital gains and income tax brackets were nearly identical. Long-term capital gains tax brackets were created under the TCJA. These figures, however, fluctuate from year to year.

Tax Rates for LTCG 2022

Tax Rates for Long-Term Capital Gains 2022
Filing Status0% rate15% rate20% rate
SingleUp to $41,675$41,676 to to $459,750Over $459,750
Head of householdUp to $55,800$55,801 to $488,500Over $488,500
Married filing jointly Up to $83,350$83,351 to $517,200Over $517,200
Married filing separatelyUp to $41,675$41,676 to $258,600Over $258,600

Are Long-Term Capital Gains Rates Going up in 2022?

Despite attempts to amend the law, capital gains will increase in 2022. The top long-term capital gains tax would be raised from 20% to 25% as part of the proposal.

Hence, transactions completed prior to September 13, 2021, would be subject to a 20% rate while transactions completed after the date would be subject to a 25% rate.

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Will my Long-Term Capital Gains put me in a Higher Tax Bracket?

Your ordinary income will not be taxed at a higher rate because of your long-term capital gains. Ordinary income is calculated and taxed separately at ordinary income rates.

More LTCG may cause your gains to be taxed at a higher rate, but it will have no effect on your regular income tax bracket.

Short-term capital gains would raise your ordinary income and push you into the next marginal ordinary income tax rate.

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What are the main exemptions for Long-term Capital Gains Tax?

The three primary exemptions for long-term capital gains are:

Section 54

This section deals with long-term capital gains made while selling a home and reinvesting the proceeds in a new one.

Section 54EC

This exemption deals with long-term capital gains on the sale of a home and the reinvestment of the proceeds in designated bunds.

Section 54F

This section applies to long-term capital gains from the sale of any asset other than a home, as well as the reinvestment of the proceeds in the purchase of a home.

CAGS (Capital Gains Account Scheme)

If you’re unable to invest the long-term capital gains within the prescribed time frame. The funds should be used to construct or improve something within a certain time frame.

Are there Exceptions to Long-term Capital Gains Tax?

Collectible assets, such as antiques, fine art, coins, and even valuable vintages of wine are one f the few exceptions to the decreased long-term capital gains rate. It typically taxes profits from the sale of these items at a rate of 28%, regardless of how long you have owned the item.

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The Net Investment Income Tax (NIIT), which imposes a 3.8% surtax on some net investments made by individuals, estates, and trusts at a specified level, is another table exception. It applies to those with high earnings who also have a considerable amount of capital gains from investments, interest, and dividend income.

Conclusion

The long-term capital gains tax is usually always lower than the short-term capital gains. Most taxpayers are not required to pay the highest long-term rate. So, holding your assets entitled to capital gains for a year or more is encouraged by tax policy.

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