Curated by: Rubric Advisors
Tax Planning
Capital Gains Tax Rates
Long-term and short-term capital gains tax brackets, the 3.8% NIIT surtax, cost basis calculations, loss harvesting, and strategies for managing taxable gains.
Capital Gains Tax Rates
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Long-Term vs Short-Term Capital Gains
- Assets held longer than one year qualify for preferential long-term rates of 0%, 15%, or 20%
- Assets held one year or less are taxed at ordinary income rates up to 37%
- The 0% bracket can be valuable for retirees or low-income years to realize gains tax-free
- Holding at least one year and one day converts short-term treatment to long-term
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Long-Term vs Short-Term Capital Gains
- Assets held longer than one year qualify for preferential long-term rates of 0%, 15%, or 20%
- Assets held one year or less are taxed at ordinary income rates up to 37%
- The 0% bracket can be valuable for retirees or low-income years to realize gains tax-free
- Holding at least one year and one day converts short-term treatment to long-term
How to Calculate Capital Gains
- Capital gain equals sale price minus cost basis minus selling expenses
- Cost basis is generally the purchase price plus commissions, fees, and reinvested dividends
- Inherited assets receive a stepped-up basis to fair market value at the date of death
- Gifted assets carry over the donor's original basis, which can create a surprise tax bill
What Counts as a Capital Asset
- Stocks, bonds, mutual funds, ETFs, real estate, and collectibles are all capital assets
- Collectibles like art and coins are taxed at a maximum long-term rate of 28%
- Qualified small business stock (Section 1202) may exclude up to 100% of gains
- Cryptocurrency is treated as property by the IRS and subject to capital gains rules
Net Investment Income Tax and State Taxes
- A 3.8% NIIT surtax applies above $200K single or $250K married filing jointly MAGI
- The NIIT makes the effective top federal rate on long-term gains 23.8%
- Most states tax capital gains as ordinary income, with rates ranging from 0% to over 13%
- Nine states have no income tax; California taxes gains at up to 13.3%
Tax-Loss Harvesting
- Selling losing investments to offset gains can reduce your current-year tax bill
- Up to $3,000 of net capital losses can offset ordinary income annually
- Unused losses carry forward indefinitely to offset gains in future years
- The wash-sale rule disallows the loss if you repurchase identical securities within 30 days
Capital Loss Netting Rules
- Short-term gains and losses are netted first, then long-term gains and losses
- If one category has a net loss, it offsets the net gain in the other category
- Any remaining net loss up to $3,000 offsets ordinary income; the rest carries forward
- Strategic netting can help use losses to offset gains taxed at the highest rates first
Strategies to Manage Capital Gains
- Donating appreciated securities to charity avoids capital gains tax and provides a deduction
- Qualified Opportunity Zone investments can defer and partially reduce capital gains
- Timing asset sales across tax years helps manage bracket exposure and the NIIT threshold
- Installment sales spread gain recognition over multiple years, potentially lowering rates
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