2021-2022 Capital Gains Tax Rates — and How to Calculate Your Bill

Capital Gains Tax Rates

In this article, you will get to know what the Capital Gains Tax is and what triggers this tax. We would also tell you the Capital Gains Tax Rates in the year 2021-22, how this tax is calculated and how to save this tax.

What is the Capital Gains Tax?

The capital gains tax is a tax levied on the profits obtained from the sale of investments such as real estate, stocks and so on. Taxing on these gains depends on how long the asset was held before selling. Assets held for a year or less are considered short-term capital gains, while assets held for a year or more are termed long-term capital gains.

Most of the long-term capital gains were kept in the tax brackets of either 0%, 15% or 20% in 2021 and 2022. On the other hand, most of the short-term capital gains were kept in the tax brackets of 10%, 12%, 22%, 24%, 32%, 35% or 37%.

More on Short-Term and Long-Term Capital Gains Tax?

🔹 Short-Term Capital Gains Tax- As defined above, this is a tax levied on the profits received from the sale of assets held for a duration of one year or below. The short-term capital gains tax rate is equal to your ordinary income tax rate — as per your tax bracket.

🔹 Long-term Capital Gains Tax as defined above, this is a tax levied on the profits received from the sale of assets held for  over one year. The long-term capital gains tax rate can be either 0%, 15% or 20%, based on your filing status and taxable income. Usually, this tax rate is lower than that of the short-term capital gains tax rate.

Capital Gains Tax Rates for 2021

Tax Filing Status

Single Filer

Married and Filing Jointly

Married and Filing Separately

Head of Household

0%

$0 -$40,400

$0 -$80,800

$0-$40,400

$0 -$54,100

15%

$40,401 – $445,850

$80,801-$501,600

$40,401 -$250,800

$54,101 -$473,750

20%

$445,851 or above

$501,601 or above

$250,801 or above

$473,751 or above

Please note that as per the federal income tax brackets, short-term capital gains are taxed as ordinary income

Capital Gains Tax Rates for 2022

Tax-Filing Status

Single Filer

Married, Filing Jointly

Married, Filing Separately

Head of Household

0%

$0 -$41,675

$0 -$83,350

$0 -$41,675

$0 -$55,800

15%

$41,676 -$459,750

$83,351 -$517,200

$41,676 -$258,600

$55,801 – $488,500

20%

$459,751 or more

$517,201 or more

$258,601 or more

$488,501 or more

Please note that as per the federal income tax brackets, short-term capital gains are taxed as ordinary income

How are the Capital Gains Taxes Calculated?

Capital gains taxes are levied on investments, such as real estate, stocks, boats, cars, bonds and other tangible items. Any profit you have received from the sale of these items is termed your capital gain. Any loss you have incurred from such a sale is a capital loss. Capital gains taxes are progressive, very much like income taxes. Different types of capital gains tax calculators are available to help you calculate your gains.

You can use any capital loss you have incurred on such investments to offset gains. For example, if you have sold stock to gain a $50,000 profit this year and sold another one to incur a loss of $40,000, your total capital gains tax will be $10,000.

The difference between your capital gains and capital loss for a particular tax year is termed a “net capital gain.” In case your total loss is more than your total gain, the difference is called a “net capital loss,” and this can be used to offset your ordinary income. However, the maximum limit of such an offset is fixed at $3,000 in a particular tax year ($1,500 for a married, filing separately). Any additional losses will be carried forward to offset capital gains, up to $3,000 per year.

The following Terms are Important-

The Net Investment Income Tax-Some taxpayers or investors may need to incur an additional tax. In this,  3.8% tax is due on the smaller of your net investment income or the amount by which your modified AGI (Adjusted Gross Income) exceeds the amounts listed below.

  • For single /head of household: $200,000
  • For Qualifying widow(er) with dependent child: $250,000
  • For married and joint filers: $250,000
  • For married but filing separately: $125,000

Rule Exceptions- the capital gains tax rates apply to most assets as we showed in the tables above. However, some exceptions do exist. Long-term capital gains on certain “collectable assets” can be taxed up to 28%. Such assets include antiques, coins, fine art and precious metals. On these assets, short-term gains are taxed at the normal tax rate.

How can you Reduce Capital Gains Taxes?

Here is a look at ways how you can minimize your capital gains taxes-

🔹 Exclude Home Sales

To qualify for the exclusion from capital gains, you must have owned and used the house as your primary residence for a minimum of two years in the 5 years before selling it. Also, you must not have excluded another home in the 2 years before selling the home. If you satisfy these criteria, you can exclude a maximum of $250,000 from the gains received from a home sale, if you are a single filer. If you are married and filing jointly, the maximum you can exclude is $500,000.

🔹 Hold on for a Longer Period

Please note that the long-term capital gains tax rate is significantly lower than the short-term capital gains rate for most assets. Therefore, if possible, it is better to hold on to an asset for a year or more so that you can qualify for the long-term capital gains tax rate. To figure out how much you can save, you may take the help of a capital gains tax calculator.

🔹 Use Tax-Advantaged Accounts

Tax-advantaged accounts include individual retirement accounts, 401(k) plans and 529 college savings accounts. In such accounts, the investments grow tax-deferred or even tax-free. This means if you sell investments within these accounts, you are not required to pay capital gains tax. Roth IRAs and 529 accounts are known to provide significant tax advantages. Qualified distributions from these accounts are tax-free and you need not pay taxes on investment earnings. However, with 401(k)s and traditional IRAs you will need to pay taxes when you receive distributions in retirement.

🔹 Rebalance with Dividends

Instead of reinvesting dividends in the very investment that paid them, you may rebalance by investing in your underperforming investments. Usually, you will rebalance by selling high-performing securities and investing this money into the underperforming assets. Thus, using dividends to boost underperforming assets will let you avoid selling good performers, and, in turn, avoid capital gains coming from that sale.

🔹 Carry Forward the Losses

If your net capital loss is over the limit you are allowed to deduct for the tax year, you can carry the excess amount forward into the next year. You may then deduct it on next year’s return.

🔹 Consider the Services of a Robo-Advisor

An experienced Robo-advisor can manage your investments better with smart tax strategies such as ‘tax-loss harvesting’. This involves selling off underperforming investments in order to offset the gains from the high-performing ones.

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