Calculate capital gains tax on stock sale

What are capital gains?Capital gains are the profits you earn between the time you purchase an investment and the time you sell it. The purpose of investing is to grow your wealth, and therefore it’s to be expected that there will be certain tax implications when it comes to the revenue you gain from your investments over time.Capital Gains = Sale Price – Purchase PriceAs an investor, it’s important to understand how capital gains are taxed so that you can make strategic decisions when it comes to how long you hold onto capital assets, like stock, before selling it. Current tax legislation in the U.S. incentivizes long-term investing by providing investors with a substantially lower tax obligation if they hold onto their investments for a year or more. On the other hand, short-term investing is subject to the same tax rate as your regular income.

Long-term capital gains

The realized revenue you earn on an asset that had been owned for 12 months or more is called long-term capital gains. If you were to sell this asset one year or more after the time of purchase, the long-term capital gains taxes would apply. Long-term capital gains taxes are more favorable than short-term capital gains taxes because they are almost certain to be taxed at a lower rate.

As of Jan. 2022, long-term capital gains taxes can range from 0% to 20% based on your tax bracket and filing status. The calculator on this page is designed to help you estimate your projected long-term capital gains tax obligation based on the income made from your assets as well as the nuances of your financial circumstances.

Short-term capital gains

Short-term capital gains occur when you earn revenue on an asset that has been sold within a year of ownership. This income is likely to be taxed at a higher rate since your standard income tax rate would apply. Of the seven existing tax brackets in the U.S., five are higher than the 20% maximum rate for long-term capital gains.

Capital losses

For some investors, the sale price of an asset might be less than the amount of money you paid for it, reflecting a capital loss. In these cases, a capital loss deduction may apply. If you are eligible, a capital loss deduction can offset income earned during the year.

Currently, taxpayers can deduct up to $3,000 worth of capital losses from their income. If your capital losses exceed this amount, you can apply the remaining deductions forward to future years.

Just as tax laws differentiate between long- and short-term capital gains, the same is true for losses. When calculating your overall deltas for long and short-term investments, consider both gains and losses. If your overall net result is a profit, then the capital gains rules above apply. If for one or either you have a loss, then you might be eligible to deduct $3,000 from your taxable income for the year.

History of capital gains tax

The first capital gains tax was introduced along with the first federal income tax legislation in 1913. Capital gains tax rates have fallen in recent years after peaking in the 1970s. Currently, the maximum capital gains rate is 20%.

Proponents of maintaining a relatively low capital gains tax rate argue that lower rates make investing more accessible to more people and stimulate economic growth. Those who believe the rates should be higher argue that low capital gains tax rates provide a loophole through which wealthy individuals can evade paying their fair share of taxes.

Bottom line

Understanding the difference between long- and short-term capital gains, and the tax implications for each, is an important exercise for investors. This knowledge is not only useful during tax season; it may also inform your decisions to hold on to or sell stock at certain intervals. Remember that the tax implications will vary by individual, and are tied to your overall financial circumstances.

The above content is provided is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

As an investor, it’s important to understand the taxes you may be subject to because of your investments. One of the more common taxes that investors pay is the capital gains tax. A capital gain is the increase or appreciation in an asset’s value and is realized when the capital asset is sold. When an asset is sold for a profit in a taxable account, capital gains tax is incurred.

Capital gains taxes can be a confusing and often unforeseen component of investing. To help make things simpler for you, we’ve created a capital gains calculator. This simple calculator can help you estimate how much you might owe in capital gains taxes so you’ll be prepared for tax season.

How to Calculate the Capital Gains Tax

A simple way to estimate your capital gains taxes is to use our capital gains calculator. Here’s how to use our tool to estimate how much capital gains tax you might owe:

1. Enter your taxable income for the tax year in question. For both short-term and long-term capital gains, the rate you’ll pay is based largely on your income. We’ll talk more about that shortly.
2. Enter your filing status for the tax year in question. It will be either single, married filing jointly, married filing separately, or head of household.
3. Enter the price you paid for the asset in question. Your capital gain is calculated using your basis in the asset, which is usually your purchase price. Enter in your full purchase price. (Keep in mind, however, that capital gains are realized on a per-share basis when sold.)
4. Enter the price at which you sold the same asset. Enter your full sale price.
5. Indicate whether you held the asset for more or less than one year. This factor determines whether you pay short-term or long-term capital gains taxes, which also affects the rate you’ll pay.

What is the Capital Gains Tax Rate?

To talk about the different capital gains tax rates, we first must discuss the difference between short-term and long-term capital gains. The category your gains fall into will help determine how much you’ll pay in taxes.

Short-Term Capital Gains

A short-term capital gain occurs when you hold an asset for one year or less from purchase and then sell it for a profit. For example, suppose you bought 100 shares of stock for $25, and nine months later sold them for $30 each. Because you held the shares for less than one year, you would have incurred a short-term capital gain.

Short-term capital gains are generally taxed as ordinary income, meaning at a rate somewhere between 10% and 37%. The higher your household income, the higher your short-term capital gains rate.

Tax brackets change slightly from year to year as the cost of living increases. As a result, the short-term capital gains rates for 2022 look slightly different than those for 2021.

2022 Short-Term Capital Gains Tax Brackets

Long-Term Capital Gains

A long-term capital gain occurs when you sell an asset at a profit that you’ve held for greater than one year. Going back to those 100 shares of stock in our previous example: if you held them for 13 months instead of selling them after nine months, your capital gain should be taxed at the preferential long-term capital gains rate.

Under current tax law, long-term capital gains have more favorable tax treatment. Rather than being taxed at your ordinary income rate, they are taxed at a rate of either 0%, 15%, or 20% depending on your household income.

2022 Long-Term Capital Gains Tax Brackets

Which Assets Qualify for the Capital Gains Tax?

Capital gains taxes can apply to any capital asset, which includes nearly everything you own for personal or investment purposes. Your home, furniture, vehicles, investment holdings, and other belongings are all capital assets. As a result, if you sell those assets for more than you bought them, you could be on the hook for capital gains taxes. However, the assets investors most often have to pay capital gains taxes on include investments like stocks, bonds, cryptocurrency, real estate, and more.

There are a few types of assets that are treated slightly differently for tax purposes. Perhaps one of the most important exceptions to the capital gains tax is your primary residence. Current tax law allows you to sell your home and exempt the first $250,000 of profit (or $500,000 for married couples) from the capital gains tax. In general, this exemption applies if you’ve lived in the home for at least two of the past five years, though it’s important to confirm eligibility requirements via the IRS site or with a tax advisor.

Other assets that have different tax treatment under the capital gains law include section 1202 small business stock, collectibles such as coins and art, and unrecaptured section 1250 gains from selling section 1250 property. Those assets are subject to a capital gains tax rate of 28%, 28%, and 25%, respectively.

How to Minimize Capital Gains Taxes

Though incurred because you’ve made money on your investments, capital gains taxes can be a frustrating expense when you’re trying to build wealth.  Luckily, there are steps you can take to minimize capital gains taxes (or even avoid them).

Hold Assets More Than One Year

As we mentioned, assets held for less than one year are subject to short-term capital gains taxes, while those held for more than one year are subject to long-term capital gains taxes.

Currently, long-term capital gains have a more favorable tax treatment, with many taxpayers paying a rate of 0%, and even the highest earners paying a maximum rate of 20%. Meanwhile, the highest tax bracket for short-term capital gains taxes is 37%. As a result, one easy way to reduce your capital gains taxes is to hold investments for at least one year before you sell them.

Claim Investment Losses

It’s true that you have to claim realized capital gains on your taxes. But what you may not know is that you can also claim your investment losses to either offset your capital gains or claim a deduction.

Suppose you sold an asset for a profit of $3,000, and in the same tax year, sold another asset for a $3,000 loss. You can claim both the gain and the loss on your tax return, and because your loss offsets your gain, you shouldn’t incur any capital gains taxes.

If your capital losses in a year exceed your gains, you have two options. First, the IRS allows you to deduct up to the lesser of 3,000 ($1,500 if married filing separately) or your total net loss, which can then reduce your taxable income. If net capital losses are greater than the limit, you can choose to carry forward your losses to future years, which you can then use to offset future capital gains.

Personal Capital uses a strategy known as tax-loss harvesting to help offset our clients’ capital gains. Tax loss harvesting refers to the intentional selling of securities at a loss to turn an

unrealized loss into a realized loss. Capital losses can be used to offset capital gains, creating a tax-deferred benefit that can compound over time.

Invest in Tax-Advantaged Accounts

One of the reasons — and perhaps the primary reason — why retirement accounts like 401(k) plans and individual retirement accounts (IRAs) are so popular, is their tax advantages.

In the case of a traditional 401(k) or IRA, your contributions are either pre-tax or tax-deductible, and you won’t pay taxes on your investments if you can delay withdrawing the funds until age 59 ½. In the case of a Roth IRA or Roth 401(k), you contribute after-tax money, but then can withdraw funds tax-free in retirement. It’s important to keep in mind that the IRS imposes a 10% tax penalty on all non-qualifying withdrawals from retirement accounts.

In the case of both traditional and Roth retirement accounts, you won’t pay taxes on your investments while they remain in the account. That means when you buy and sell assets, you aren’t on the hook for capital gains taxes. For that reason, it may be worth holding some of your less tax-efficient investments in your retirement account(s).

Want a better way to manage your investments? Millions of people use Personal Capital’s free and secure online financial tools to see all of their accounts in one place, analyze their investments, and plan for long-term goals, like buying a house or saving for retirement.

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The information and content provided in this blog post is general in nature and is for informational purposes only. It is not intended and should not be construed as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax advisors or other professional to help answer questions about specific situations or needs prior to taking action based on this information. Tax laws and authorities are subject to change, either prospectively or retroactively, and any subsequent change could have a material impact on your situation. To comply with U.S. Treasury Regulations, in particular IRS Circular 230, we also inform you that, unless expressly stated otherwise, the information contained in this communication is not intended to and cannot be used to avoid IRS penalties, and is provided to support the marketing of our services.Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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