When you sell something, you’re likely looking to profit from it. Capital gains are profits from an asset sale, like your home, business, or stocks. Capital gains come in two different forms: long-term and short-term. Each face different tax issues. This is the difference between short term vs long term capital gains.
What are Short-Term Capital Gains?
Profits from an asset sold within a year of buying it are short-term capital gains. As a result, they’re taxed as regular income according to your tax bracket, ranging from 10% to 37%.
For 2020, the tax bracket has been adjusted for inflation. Consequently, this is how your taxes will be handled when you file in April 2021.
SingleMarried Filing JointlyMarried Filing SeparatelyHead of Household10%$0 – $9,875$0 – $19,750$0 – $9,875$0 – $14,10012%$9,876 – $40,125$19,751 – $80,250$9,876 – $40,125$14,101 – $53,70022%$40,126 – $85,525$80,251 – $171,050$40,126 – $85,525$53,701 – $85,50024%$85,526 – $163,300$171,051 – $326,600$85,526 – $163,300$85,501 – $163,30032%$163,301 – $207,350$326,601 – $414,700$163,301 – $207,350$163,301 – $207,35035%$207,351 – $518,400$414,701 – $622,050$207,351 – $518,400$207,351 – $518,40037%$518,401+$622,051+$518,401+$518,401+What are Long-Term Capital Gains?
Profits from assets held for a year or more are long-term capital gains. The extra time you’ve held onto those assets could help you come tax season.
Long-term capital gains are taxed at 0%, 15% and 20% depending on your taxable income. As a result, they might put you in a different tax bracket compared to short-term capital gains. For example, if you earn $100,000 a year, you’re in the 15% tax bracket. For short-term capital gains, you’d be at 24%. But your gains and losses will determine which bracket or brackets you fall into.
SingleMarried Filing JointlyMarried Filing SeparatelyHead of Household0%$0 – $40,000$0 – $80,000$0 – $40,000$0 – $53,60015%$40,000 – $441,450$80,000 – $496,600$40,000 – $248,300$53,600 – $469,05020%$441,450+$496,600+$248,300+$469,050+What are Capital Losses?
Almost everything you own relates to a capital asset. Capital gains are what you earn over a certain amount of time. However, there’s also a chance you had a capital loss.
Capital loss is the money you’ve lost through your investments and assets. You can use those losses to lower your tax rate since losses offset gains. You’ll be able to determine how much you owe in taxes by calculating your “net” gains or losses. If your losses are more than your gains, you can deduct the difference on your tax return, up to $3,000 a year.
How to Lower Your Capital Gains
There are a few ways to offset capital gains taxes. They include:
- Holding for more than a year: Even if you did nothing else but own your assets for longer than a year, you could end up paying less by moving to a different tax bracket.
- Utilizing your retirement accounts: IRAs, 401(k)s and 529 plans allow investments to grow tax-free or tax-deferred. If your retirement account sells investments, you’re not on the hook for capital gains tax. Contributions to health savings accounts (HSAs) are also tax-free and assets grow tax-free.
- Carrying over your loss: Losses cap out at $3,000 a year. As a result, you can carry over the rest to the next year and claim it on that year’s tax return.
The Bottom Line
The difference between short-term vs long-term capital gains could be the difference between a big tax bill and a smaller one. When buying and selling assets, consider how long you’ve owned them and how much tax you’ll pay on them in the near future.
Short-term capital gains consist of profits from an asset sold within a year of purchase. They face a tax rate similar to regular income: Between 10% and 37%. However, if you hold onto assets for a year or more, they’re long-capital gains. Taxes on those gains top out at 20%, but may be as little as 0%. Meanwhile, if you take a capital loss, you can either deduct the loss this year or carry it over into a year when you make more income.
- Making sure your money is working hard for you isn’t always the easiest task. There will be times you need to calculate gains and losses to minimize what you owe. It can get overwhelming, which is why you might need to enlist the help of an expert. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- If you haven’t already, you might want to sign up for a robo-advisor. Many robo-advisors offer tax-loss harvesting, which sells investments that are hurting your portfolio and helps offset what you earn from the gains. Robo-advisors aren’t necessarily right for everyone, but if you’re starting your investment journey or you don’t have complicated assets, you may want to give it a try. If you’re unsure, find one that offers you the chance to talk to a financial professional if you have questions about your specific needs. Not all robo-advisors offer this perk, but some do, usually for a fee.
- If you’re just looking for an easy way to figure out your capital gains taxes, there are tools that can help you. For example, SmartAsset’s capital gains tax calculator can help you determine what you’ve gained or lost this year and what taxes you’ll pay (if any).
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