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.