Capital Gains -Tax Rates and Brackets for 2022-2023 Investment Income
Learn about 2022-2023 capital gains tax rates and brackets and strategies to minimize your tax bill. Individuals who invest their money in taxable brokerage trading accounts – as opposed to tax-favored retirement accounts like IRAa or 401(k)s – quite often qualify for lower rates on investment income and other benefits. I usually write about corporate and business tax topics, but since many of my clients and other small to medium-sized business owners might be investing in the stock market or real estate, I thought it would be useful to discuss taxes on capital gains investments. The last time I wrote about long-term capital gains was back in 2019. Let’s cover some of the basics as a refresher.
Some key takeaways from this topic
- The capital gains tax rates range from 0% to 20% for long-term gains and 10% to 37% for short-term gains.
- Capital gains taxes only apply when you sell an investment or asset.
- Capital gains taxes apply only to “capital assets,” which include stocks, bonds, digital assets like cryptocurrencies and NFTs, jewelry, coin collections, and real estate.
- Long-term gains are levied on profits of investments held for more than a year.
- The difference between short- and long-term capital gains is how long you hold the asset. Assets held for more than a year are considered long-term.
What is capital gain or loss?
The capital gains tax is the levy on the profit that an investor makes when an investment is sold. It is owed for the tax year during which the investment is sold. Recently the WSJ, published an article about this topic, explaining that “when an investor sells a holding in a taxable account, the result is a capital gain or loss that is the difference between the investment’s original cost (plus adjustments) and its selling price.” How the capital gain is taxed depends on filing status, taxable income, and how long the asset was owned before selling. An article in Nerd Wallet states that “capital gains taxes apply to what are called capital assets. This can include investments such as stocks, bonds, cryptocurrency, real estate, cars, boats, and other tangible items.”
They gave an example, say an investor buys a share of stock for $6 and sells it for $10, the capital gain is $4. If that person buys another share for $6 and sells it for $4, then the capital loss is $2.
Most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. That gives them a financial incentive to hold investments for at least a year, after which the tax on the profit will be lower.
An article in Investopedia points out that retail and professional day traders and others taking advantage of the ease and speed of trading online need to be aware that any profits they make from buying and selling assets held less than a year are not just taxed—they are taxed at a higher rate than assets that are held long-term.
Dividends and capital gains taxes
Yes the IRS always wants a piece, but one key advantage investors can uses is that capital losses can offset capital gains. If we keep with the same example mentioned by the WSJ article above, if a person sells both shares in the same calendar year, they would net a $4 gain with a $2 loss, for a taxable capital gain of $2.
So if the total losses are more than the total gains, the net losses can offset up to $3,000 of “ordinary” income such as wages earned that year. The remaining unused capital losses can then be carried forward to offset future capital gains and ordinary.
The current tax rate on capital gains and dividends?
Congress hasn’t made any major legislative changes to rates on long-term capital gains and dividends for 2022 and 2023. So currently Long-term capital gains are profits on investments held longer than a year. They are taxed at favorable rates of 0, 15% or 20%. It’s important for frequent stock traders pay careful attention to the distinction between:
- Short-term capital gains: are profits on investments held a year or less, and they are taxed at the higher rates that apply to ordinary income. The short-term capital gains tax rate equals your ordinary income tax rate or your tax bracket.
- Long-term capital gains: are a tax on profits from the sale of an asset held for more than a year. they are generally lower than short-term capital gains tax rates. The favorable tax rates for long-term gains also apply to “qualified” dividends, and most dividends fall in this category.
- Nonqualified dividends are taxed at the “higher rates” for ordinary income like wages.
How capital gains taxes are calculated
There is a “holding period”, which is used for determining how the profit gets classified for tax purposes, is — the time between the purchase of the asset and its sale.
Profits made on assets held for a year or less before sale are considered short-term capital gains, while profits made on assets held for longer than a year are long-term capital gains.
Only assets that have been “realized,” or sold for profit, are subject to capital gains tax. This means that you won’t incur taxes on any unsold, or “unrealized,” investments that are, say, sitting in a brokerage account untouched. This is a good thing for long-term investors, as it allows an asset to grow in value over time without being taxed until the point of sale. Capital gains taxes are also progressive, similar to income taxes.
Capital gains tax rates for 2022
The 2022 capital gains tax rates apply to assets sold for a profit in 2022. Capital gains are reported on Schedule D, which should be submitted with your federal tax return (Form 1040) by April 18, 2023, or by Oct. 16, 2023, with an extension.
Short Term Capital Gains Tax Rates
|Single||Up to $10,275||$10,276 to $41,775||$41,776 to $89,075||$89,076 to $170,050||$170,051 to $215,950||$215,951 to $539,900||Over $539,900|
|Head of household||Up to $14,650||$14,651 to $55,900||$55,901 to $89,050||$89,051 to $170,050||$170,051 to $215,950||$215,951 to $539,900||Over $539,900|
|Married filing jointly||Up to $20,550||$20,551 to $83,550||$83,551 to $178,150||$178,151 to $340,100||$340,101 to $431,900||$431,901 to $647,850||Over $647,850|
|Married filing separately||Up to $10,275||$10,276 to $41,775||$41,776 to $89,075||$89,076 to $170,050||$170,051 to $215,950||$215,951 to $323,925||Over $323,925|
Short-term capital gains are taxed as ordinary income according to federal income tax brackets.
long Term Capital gains tax rates for 2022
|Tax-filing status||0% tax rate||15% tax rate||20% tax rate|
|Single||$0 to $41,675.||$41,676 to $459,750||$459,751 or more.|
|Married, filing jointly||$0 to $83,350.||$83,351 to $517,200.||$517,201 or more.|
|Married, filing separately||$0 to $41,675.||$41,676 to $258,600.||$258,601 or more.|
|Head of household||$0 to $55,800.||$55,801 to $488,500.||$488,501 or more.|
Capital gains tax rules and considerations
The Nerdwallet article mentions some other notable rules and exceptions that come into play.
1. Collectible assets. The capital gains tax rates in the tables above apply to most assets, but there are some noteworthy exceptions. Long-term capital gains on so-called “collectible assets” can be taxed at a maximum of 28%; these are things such as coins, precious metals, antiques and fine art. Short-term gains on such assets are taxed at the ordinary income tax rate.
2. The net investment income tax. Some investors may owe an additional 3.8% that applies to whichever is smaller: Your net investment income or the amount by which your modified adjusted gross income exceeds the amounts listed below.
The income thresholds that might make investors subject to this additional tax are:
Single or head of household: $200,000.
Married, filing jointly: $250,000.
Married, filing separately: $125,000.
Qualifying widow(er) with dependent child: $250,000.
What is the 3.8% surtax?
Strategies to avoid, reduce or minimize capital gains taxes
The capital gains tax effectively reduces the overall return generated by the investment. But there is a legitimate way for some investors to reduce or even eliminate their net capital gains taxes for the year.
1. Hold on
Whenever possible, hold an asset for a year or longer so you can qualify for the long-term capital gains tax rate, since it’s significantly lower than the short-term capital gains rate for most assets. Our capital gains tax calculator shows how much that could save.
2. Use tax-advantaged accounts
These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don’t have to pay capital gains tax if you sell investments within these accounts. Roth IRAs and 529 accounts in particular have big tax advantages. Qualified distributions from those are tax-free; in other words, you don’t pay any taxes on investment earnings. With traditional IRAs and 401(k)s, you’ll pay taxes when you take distributions from the accounts in retirement.
3. Rebalance with dividends
Rather than reinvest dividends in the investment that paid them, rebalance by putting that money into your underperforming investments. Typically, you’d rebalance by selling securities that are doing well and putting that money into those that are underperforming. But using dividends to invest in underperforming assets will allow you avoid selling strong performers — and thus avoid capital gains that would come from that sale.
4. Carry losses over
You can use investment capital losses to offset gains. For example, if you sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains of $6,000. If your net capital loss exceeds your net capital gains, you can offset your ordinary income by up to $3,000 ($1,500 for those married filing separately). Any additional losses can be carried forward to future years to offset capital gains or up to $3,000 of ordinary income per year.
5. Watch Your Holding Periods
Remember that an asset must be sold more than a year to the day after it was purchased in order for the sale to qualify for treatment as a long-term capital gain. If you are selling a security that was bought about a year ago, be sure to check the actual trade date of the purchase before you sell. You might be able to avoid its treatment as a short-term capital gain by waiting for only a few days.18
These timing maneuvers matter more with large trades than small ones, of course. The same applies if you are in a higher tax bracket rather than a lower one.
As I mentioned earlier Congress hasn’t made changes to rates on long-term capital gains and dividends for 2022 and 2023.
Proponents of a low rate on capital gains argue that it is a great incentive to save money and invest it in stocks and bonds. That increased investment fuels growth in the economy. Businesses have the money to expand and innovate, creating more jobs. There are ways to lessen the impact of capital gains taxes and retain more of your earnings if you take the right steps with the right Certified Public Accountant (CPA.) Tax filing is approaching soon if you are not ready you cn always file an extension, if you have questions, feel free to contact Huckabee CPA for a free consultation.