Capital gains tax is the tax you pay on the profit you make from selling an asset, such as stocks, bonds, or real estate. This guide explains how to calculate your liability.
Short-Term vs. Long-Term Capital Gains
The most important factor in capital gains tax is how long you held the asset before selling:
- Short-Term Capital Gains: Assets held for one year or less. These are taxed at your regular income tax rate (up to 37% in the US).
- Long-Term Capital Gains: Assets held for more than one year. These benefit from lower tax rates (0%, 15%, or 20% in the US), designed to encourage long-term investing.
The Formula
The basic calculation is:
Taxable Gain = Selling Price - (Purchase Price + Transaction Costs)
- Selling Price: The total amount you received from the sale.
- Purchase Price (Cost Basis): The original amount you paid for the asset.
- Transaction Costs: Fees like broker commissions, legal fees, or real estate closing costs.
Step-by-Step Example
If you bought 100 shares of a stock for $10,000 and sold them two years later for $15,000:
- Calculate Profit: $15,000 - $10,000 = $5,000 Profit.
- Determine Hold Duration: 2 Years = Long-Term.
- Apply Rate: If your income falls in the 15% bracket for long-term gains:
* $5,000 × 0.15 = $750 Tax Due.
Tips to Reduce Capital Gains Tax
Tax-Loss Harvesting: Selling losing investments can "offset" the gains from your winning ones, reducing your total taxable profit. Qualified Retirement Accounts: Capital gains inside a 401(k) or IRA are either tax-deferred or tax-free (with a Roth). * Hold Assets Longer: Waiting just one day past the 1-year mark can cut your tax rate on a gain in half.
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Disclaimer: Capital gains rules vary significantly for different asset classes (like collectibles or primary residences). This calculator provides an estimate for general investment assets. Consult with a tax professional for complex transactions.