Calculating any kind of tax, and the rate which you should apply to it, is not for the fainthearted. This is especially true of capital gains taxes. Why? Because so many factors can, and usually do, come into play when you’re dealing with capital gains. To begin with, as you already likely know, there are two types of capital gains taxes, one of which you’re sure to be liable for when you sell or otherwise dispose of an asset: long-term and short-term. Each of these has its own rate structure.
Nevertheless, regardless of which type of capital gains taxes you’re calculating, you will first need to know the following:
- Your basis in the asset, i.e., the amount you originally paid for it, plus the amount of any capital improvements you made since you bought it
- Your realized amount on its sale, i.e., the sale price less any commissions and fees you paid
- The length of time you held it
Long-term Capital Gains
Your long-term capital gains rate, i.e., the rate applied to assets you hold for one year or longer, depends on the amount of your taxable income.
For 2021, the three long-term capital gains rates and the incomes to which they apply break down as follows:
- 0% if you are a married taxpayer filing jointly with your spouse and have a household income of $80,800 or less
- 15% if you are a married taxpayer filing jointly with your spouse and have a household income of between $80,801 and $501,600
- 20% if you are a married taxpayer filing jointly with your spouse and have a household income of $501,601 or higher
Keep in mind that these rates adjust each year to account for inflation. Also keep in mind that the latest proposal from House Democrats is to raise the top rate to 25% plus the 3.8% surtax on net investment income for a new total of 28.8% for joint filers earning more than $450,000 per year. While less than the 39.6% top rate for filers earning $400,000 and above that President Biden proposed in his American Families Plan, the House Democrats’ counterproposal, if passed, still represents a significant capital gains tax increase on wealthier Americans. And keep in mind these rates do not include your State Income Tax, so if you are in a high tax state such as California, you could be saddled with up to an additional 13.3% in taxes.
Short-term Capital Gains
Your short-term capital gains rate, i.e., the rate applied to assets you hold for less than one year, is the same as your ordinary income tax rate. It therefore likewise depends on the amount of your taxable income and which tax bracket this amount puts you in. For 2021, these rates and brackets for married couples filing jointly break down as follows:
- 37% for incomes over $628,300
- 35% for incomes between $418,850 and $628,300
- 32% for incomes between $329,850 and $418,850
- 24% for incomes between $172,750 and $329,850
- 22% for incomes between $81,050 and $172,750
- 12% for incomes between $19,900 and $81,050
- 10% for incomes up to $19,900
In addition to facing a long-term or short-term capital gains tax liability when you sell an appreciated asset, you may also face an additional 3.8% net investment income (NII) tax if you and your spouse file a joint return and have a modified adjusted gross income (AGI) of $250,000 or more.
Don’t forget, most states will impose their own state income tax on your gains, so be sure to look at all the rates and factors.