| 2022 Tax Rate | For SingleFilers | For Married Individuals Filing Joint Returns | For Heads of Households |
|---|---|---|---|
| 10% | $0 to $10,275 | $0 to $20,550 | $0 to $14,650 |
| 12% | $10,275 to $41,775 | $20,550 to $83,550 | $14,650 to $55,900 |
| 22% | $41,775 to $89,075 | $83,550 to $178,150 | $55,900 to $89,050 |
| 24% | $89,075 to $170,050 | $178,150 to $340,100 | $89,050 to $170,050 |
| 32% | $170,050 to $215,950 | $340,100 to $431,900 | $170,050 to $215,950 |
| 35% | $215,950 to $539,900 | $431,900 to $647,850 | $215,950 to $539,900 |
| 37% | $539,900 or more | $647,850 or more | $539,900 or more |
Note
Investors who may find themselves paying short-term capital gains taxes include day traders who buy and sell shares throughout the day in an effort to time the market.
Suppose you decided to try your hand at day trading and you made a profit of $1,000 throughout the year. You’ll pay taxes on those gains at the same rate as your ordinary income when tax time rolls around. You can expect to pay as much as 22% in taxes on that portion of your income if you end the year with $60,000 in taxable income, including your day trading profits.
How To Minimize Capital Gains Taxes
You can minimize capital gains taxes using a few strategies.
Hold Your Investments Longer
The long-term capital gains tax rate is usually lower than the rate for short-term capital gains. An individual making up to $41,000 in taxable income, or a married couple making up to $83,000, will pay no taxes at all on a long-term capital gain in 2022. These same people would pay up to 12% for a short-term capital gain. And the difference could be 20% for long-term capital gains versus 37% for short-term capital gains earned in tax year 2022 for very high earners.
Tip
One of the easiest ways to reduce your capital gains taxes is to hold your asset for even a day more than one year.
Invest in Tax-Advantaged Retirement Accounts
Tax-advantaged retirement accounts such as 401(k)s and individual retirement accounts (IRAs) aren’t subject to the same capital gains taxes as other investments. You can buy and sell assets within these accounts without worrying about paying a capital gains tax. These tax-advantaged rules also apply to 529 college savings plans.
Take Advantage of Tax Loss Harvesting
Tax loss harvesting is a strategy that involves selling securities at a loss to offset the amount of the gain you realized on other investments that you sold. This strategy helps reduce your overall tax liability because the loss can help cancel out the gain.
Suppose you invest $1,000 in Fund A and $1,000 in Fund B. One year later, you sell Fund A at $1,300 and Fund B at $500. You realized a gain of $300 with Fund A and a loss of $500 with Fund B. You wouldn’t owe any tax on the gain, because you lost more than you gained. That amount can also help you reduce your taxable income.
Claim Your Capital Losses
The IRS allows you to claim your capital losses up to a certain amount and use them to offset your capital gains. A capital loss occurs when you sell an asset for less than what you paid for it. Be sure to claim any losses to help reduce your capital gains tax burden when you file your tax return.
You can also claim up to $3,000 or $1,500 (if married filing separately) in capital losses as a tax deduction for the 2022 tax year —the return you'd file in 2023. You can carry any unused balance forward to subsequent tax years if your losses exceed this amount. This is subject to a host of rules, however.
For example, if you incurred a $10,000 loss this year but also realized capital gains of $2,000 on your stock portfolio, you could offset that gain against your loss as well as claim $3,000 ($1,500 if married filing separately) as a capital loss deduction. You'd be able to carry forward and claim the remaining $5,000 as capital loss deduction in future years. Tax planning for investors focuses on deferring the sale of profitable investments until you qualify for the discounted long-term capital gains tax rate.
Important
Losses realized on the purchase and sale of personal property, such as your home or car, aren't deductible.
Pay Attention to Your Income
The rate at which a long-term capital gain is taxed depends on your income for the year. Consider holding the asset until a year when your income might be lower if your income is right over the limit of a capital gains tax bracket.
Just a small change in your income can make a pretty significant difference. Someone making $41,000 in taxable income might not pay any long-term capital gains taxes at all, while someone with $42,000 in taxable income would pay 15% in long-term capital gains taxes.
Consider finding other ways to reduce your taxable income, such as looking for deductions you might qualify for, if you don't anticipate your income going down in the future. Slightly increasing your deductible contributions to a retirement account may reduce your taxable income enough to bring you down to a lower long-term capital gains tax rate.
Unusual Capital Gains Situations
While the short-term and long-term capital gains rules apply to many investments, there are a handful of exceptions.
Capital Gains on Mutual Funds
Capital gains apply slightly differently to mutual funds. Unlike other types of assets, you might be subject to capital gains taxes for your mutual fund holdings even if you don’t sell your shares.
Mutual fund companies must pass earnings on to shareholders in the form of distributions throughout the year. You’ll still have to report and pay capital gains taxes on them even if you reinvest your distributions back into the fund.
Note
You’ll receive an IRS Form 1099-DIV if you invest in a mutual fund and receive distributions subject to capital gains taxes.
Capital Gains on your Primary Residence
The IRS offers a capital gains exclusion to homeowners who are selling their primary residences. Be sure to take advantage of the exclusion amount when filing your taxes if you sell your home for more than you paid for it. You can exclude the first $250,000 (or $500,000 for married couples) of your capital gain from taxes if:
- You owned the home for at least two of the past five years.
- You owned the home and used it as your residence for at least two of the past five years.
- You didn’t sell another home during the two years before the date of sale or didn’t take an exclusion from the sale.
Capital Gains on Collectibles
The tax rate on capital gains from the sale of collectibles is 28%. Collectibles include:
- Stamps
- Coins
- Precious metals
- Precious gems
- Rare rugs
- Antiques
- Alcoholic beverages
- Fine art
Important
Some precious metal coins and bullion are considered regular investment assets. They're not collectibles for tax purposes.
Capital Gains on Depreciated Property
The IRS taxes unrecaptured Section 1250 gains at a rate of 25%. This section of the tax code applies to property you own that has depreciated in value over time, resulting in a tax break.
Capital Gains on Small Business Stock
You’ll be taxed at a rate of 28% if you sell qualified small business stock and receive a capital gain.
Net Investment Income Tax
You might also be subject to the net investment income tax (NIIT), depending on your annual income. This rule results in an additional 3.8% tax on certain investment income for single filers with modified adjusted gross incomes (MAGIs) of $200,000 or more, and married individuals filing jointly with MAGIs of $250,000 or more.
Frequently Asked Questions (FAQs)
How do you avoid paying capital gains taxes on stocks?
There are only three ways in which an investor can avoid paying capital gains on stocks. First, they can trade the stock in a tax-sheltered account, such as a Roth IRA. Second, they can sell a separate stock at a loss to cancel out the profits, this is called tax-loss harvesting. Third, they can avoid paying capital gains taxes by avoiding selling stock. If you have a net profit from capital gains in a taxable account, you can't avoid capital gains taxes.
When do you pay capital gains taxes?
You are liable to pay capital gains tax if your income meets a certain threshold and you incur a net capital gain during the tax year. If you're a relatively small-time investor who has a few hundred dollars in total profit on the year, then you will settle your capital gains tax liability when you file your tax returns. However, if you expect to owe at least $1,000 when you file your returns, then you must calculate and pay quarterly estimated taxes.
