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Tax on Capital Gains

Updated: Jun 15, 2021

A capital gains tax is a tax on the growth in value of investments incurred when individuals and corporations sell those investments. When the assets are sold, the capital gains are referred to as having been "realized." The tax doesn't apply to unsold investments or "unrealized capital gains," so stock shares that appreciate every year will not incur capital gains taxes until they are sold, no matter how long you happen to hold them. The U.S. capital gains tax only applies to profits from the sale of assets held for more than a year, referred to as "long-term capital gains." The rates are 0%, 15%, or 20%, depending on your tax bracket. Short-term capital gains tax applies to assets held for a year or less, and are taxed as ordinary income.

A capital gain occurs when you sell an asset for more than you paid for it. Expressed as an equation, that means:

Capital Gain = Selling Price - Purchase Price

What Assets are subject to Capital Gain Tax? Stocks

  • Bonds

  • Jewelry

  • Your home

  • Your vehicle

  • Collectibles 2

  • Foreign exchange (forex trading)

  • The sale of Stock Shares

  • The sale or exchange of Cryptocurrency

Why is this important to know?

As people are becoming financially literate, more and more they are starting to take investment ventures. It would behoove taxpayers to start planning ahead considering President Biden’s proposed changes to long-term capital gains taxes—the portion of his American Families Plan that would fund its provisions for infrastructure, health insurance, education and other areas.

Currently, Americans earning over $441,450 (over $469,050 for married filing jointly) in 2021, pay a top rate of 20% on long-term capital gains—money they’ve made on investments that were held for one year or longer. (Hold that investment for a year or less, and you pay short-term capital gains tax, the same tax you pay on ordinary taxable income—for which the highest bracket is currently 37% for incomes over $523,600 for single filers and over $628,300 for married filing jointly.)

The American Families Plan calls for restoring the 39.5% top tax bracket, eliminated by the Tax Cuts and Jobs Act of 2017. It also mandates that households earning more than $1 million would lose the long-term capital gains tax break and pay a top marginal rate of 39.6% on all income—including investments, no matter how long they were held. This group represents the top 0.3% of households.

More on Capital Gains: Capital Gains 101

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