Capital Gains Under US Tax Law

Who pays capital gains tax ? is the first question that may arise in a taxpayer and answer is simple -anyone who gains on selling or transferring a capital asset will have to pay tax on the amount of gain . I know the next question in your mind -“what is a capital asset ?” . Well, everything you own and use for personal or investment purposes is a capital asset. For example , land , a home, household furnishings, stocks or bonds or even cryptocurrencies held as investments .

Types of capital gains

The capital gains tax in usa are two types of capital assets- Long Term Capital Asset and Short Term Capital Asset. US Code 1222 defined “Short Term Capital Gains ” as under:

The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.

How do you determine whether your asset is long term or short term ? Easy , just find out the number of months of holding period . So , if you hold the asset for more than one year it is long term capital asset. If you held for less than one year it is short term capital asset. Therefore, if you gain on sale of long term capital asset , it is long term capital gain and if you sell short term capital asset , it is short term capital gains.

Rate for capital gains tax

The rate for capital gains tax are different for two types of the gains described above. The capital gains tax long term are taxed at much lower rate ( see below) , in some case at zero rate in comparison to capital gains tax short term which are subject to taxation as ordinary income at graduated tax rates.

How capital gains tax is calculated

Capital gain or loss can be found by subtracting the adjusted basis of the capital asset from amount realized out of sale. If the number is positive, you have a capital gain, if it’s negative, you have a capital loss that you can use to offset other taxable gains. Use our capital gains calculator

What is adjusted basis ?

The actual cost of property is called basis of property. However , certain other costs related to buying or producing the property may also be involved. If you spent on improvement of property , the original basis in property is adjusted by adding the cost of improvement.Similarly ,if you take deductions for depreciation or casualty losses, reduce your basis. This adjustment of basis is called adjusted basis of property.

The capital gains tax for real estate is thus sale consideration minus adjusted basis in property. If the net amount is negative , it is capital loss that can be utilized for adjusting other gains. You can plan capital gains tax avoidance as per law. You can save on capital gains tax when selling a house . Section 121 of US Code 26 provides that capital gains on the sale  of a primary residence shall be tax-free up to  $ 2,50,000 apart from under certain conditions, you can claim exemption on long term capital gains earned on sale of a residential house. There are various ways in which you can defer capital gains. For example by investing in qualified opportunity fund (QOF) to defer capital gains

Capital gains tax brackets

2019 Short Term Capital Gains Tax Brackets

Tax Bracket/RateSingleMarried Filing JointlyHead of Household
10%$0 – $9,700$0 – $19,400$0 – $13,850
12%$9,701 – $39,475$19,401 – $78,950$13,851 – $52,850
22%$39,476 – $84,200$78,951 – $168,400$52,851 – $84,200
24%$84,201 – $160,725$168,401 – $321,450$84,201 – $160,700
32%$160,726 – $204,100$321,451 – $408,200$160,701 – $204,100
35%$204,101 – $510,300$408,201 – $612,350$204,101 – $510,300
37%$510,301+$612,351+$510,301+

2019 Long-Term Capital Gains Rates

capital gains tax percentageSingleMarried Filing JointlyHead of Household
0%$0 – $39,375$0 – $78,750$0 – $52,750
15%$39,376 – $434,550$78,751 – $488,850$52,751 – $461,700
20%$434,551+$488,851+$461,701+