Capital Gains Tax Rates 2021-2022 Guide

When your investment rises in value, there’s usually a tax implication

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You have a capital gain when you sell a valuable asset for more than you paid when you purchased it. As with other types of financial gains, the Internal Revenue Service (IRS) expects you to pay taxes on this profit. The capital gains tax rate you’ll pay depends on a couple of factors, including your taxable income and whether it’s a short-term or long-term financial gain.  

Key Takeaways

  • Capital gains occur when you sell an asset for a profit.
  • Short-term gains are those on assets you've held for one year or less, while long-term gains apply to assets held for more than a year.
  • Short-term capital gains are taxed as regular income.
  • Long-term capital gains are taxed at variable rates, with many opportunities to minimize tax liability through strategic investing.

Short-Term vs. Long-Term Capital Gains

A capital gain is the profit you earn from selling an asset for more than what you paid for it. These profits are subject to capital gains taxes. The tax rate depends on how long you held the asset before selling it.

A short-term capital gain occurs when you hold an asset for one year or less, then sell for a profit. Suppose you buy stock in your favorite company. The stock’s price goes up a few months later, and you decide to sell your shares to lock in your gains. The money you make is considered a short-term capital gain because you held the stock for less than one year.

A long-term capital gain occurs when you sell for a profit after holding an asset for more than one year. Selling for a profit would result in a long-term capital gain if you had purchased that same stock of your favorite company, but you held onto your shares for a few years rather than a few months.

Buy-and-hold investing is a common example of when you might pay long-term capital gains taxes or not pay them, depending on your income. People who use this strategy often put their money into investments such as index funds or exchange-traded funds (ETFs), then hold them for long periods, often many years. Any profits you’ve made could be subject to long-term capital gains when you ultimately sell your investments.

How Capital Gains Are Calculated

Capital gains tax is paid on the difference between an asset’s adjusted basis and the amount for which you sell it. The adjusted basis simply refers to the amount an item costs you in most cases. For example, your basis would be $50 plus any fees or commissions you paid if you purchase a share of stock for $50.

Suppose you bought that $50 share of stock and paid $1.25 in fees. Your adjusted basis would be $51.25. Now suppose that one year later, you sold that same share of stock for $70. Your capital gain is the difference between $51.25 and $70, or $18.75. You’d paid capital gains tax on the $18.75.

2021-2022 Capital Gains Tax Rates

Long-term capital gains taxes apply when you sell an asset at a profit after holding it for more than one year. The tax rate on these gains ranges from 0% to 20%, depending on your annual taxable income.

Single taxpayers and those who are married and filing separate returns won’t pay a capital gains tax if their income was $40,400 in 2021, increasing to $41,675 in 2022. The threshold is slightly higher for heads of household and twice as much for married couples filing jointly.

Only single people who made more than $445,850 and married couples who earned more than $501,600 or more in 2021 will pay the highest capital gains tax rate. These income thresholds increase to $459,750 for single taxpayers and to $517,200 for married couples filing joint returns in tax year 2022.

Long-Term Capital Gains Tax Rates for Tax Year 2022

Capital Gains Tax Rate Taxable Income, Single Taxable Income, Married Filing Separately Taxable Income, Head of Household Taxable Income, Married Filing Jointly
0% Up to $41,675 Up to $41,675 Up to $55,800 Up to $83,350
15% $41,676 to $441,450 $41, 676 to $248,300 $55,801 to $496,050 $83,351 to $517,200
20% $459,750 or more $258,600 or more $488,500 or more $496,601 or more

These income thresholds are adjusted periodically to keep pace for inflation. They're more generous in 2022 than they were in 2021.

Long-Term Capital Gains Tax Rates for Tax Year 2021

Capital Gains Tax Rate Taxable Income, Single Taxable Income, Married Filing Separately Taxable Income, Head of Household Taxable Income, Married Filing Jointly
0% Up to $40,400 $40,400 Up to $54,100 Up to $80,800
15% $40,401 to $445,850 $40,401 to $250,800 $54,101 to $473,750 $80,801 to $501,600
20% $445,851 or more $250,801 or more $473,751 or more $501,601 or more

Short-Term Capital Gains Tax

A short-term capital gains tax applies when you sell an asset after holding it for one year or less. Unlike long-term capital gains, short-term gains are taxed as ordinary, or regular, income. You can expect to pay taxes on those gains at the same rate you’d pay in income taxes as a result. You could pay anywhere from 10% to 37% on those gains, depending on how much you earn.

Investors who may find themselves paying short-term capital gains taxes include day traders who buy and sell shares throughout the day in an effort to time the market. 

Suppose you decided to try your hand at day trading and you made a profit of $1,000 throughout the year. You’ll pay taxes on those gains at the same rate as your ordinary income when tax time rolls around. You can expect to pay as much as 22% in taxes on that portion of your income if you end the year with $60,000 in taxable income, including your day trading profits.

How To Minimize Capital Gains Taxes

You can minimize capital gains taxes using a few strategies.

Hold Your Investments Longer

The long-term capital gains tax rate is usually lower than the rate for short-term capital gains. An individual making up to $41,000 in taxable income, or a married couple making up to $83,000, will pay no taxes at all on a long-term capital gain in 2022. These same people would pay up to 12% for a short-term capital gain. And the difference could be 20% for long-term capital gains versus 37% for short-term capital gains earned in tax year 2022 for very high earners.

One of the easiest ways to reduce your capital gains taxes is to hold your asset for even a day more than one year.

Invest in Tax-Advantaged Retirement Accounts

Tax-advantaged retirement accounts such as 401(k)s and individual retirement accounts (IRAs) aren’t subject to the same capital gains taxes as other investments. You can buy and sell assets within these accounts without worrying about paying a capital gains tax. These tax-advantaged rules also apply to 529 college savings plans.

Take Advantage of Tax Loss Harvesting

Tax loss harvesting is a strategy that involves selling securities at a loss to offset the amount of the gain you realized on other investments that you sold. This strategy helps reduce your overall tax liability because the loss can help cancel out the gain.

Suppose you invest $1,000 in Fund A and $1,000 in Fund B. One year later, you sell Fund A at $1,300 and Fund B at $500. You realized a gain of $300 with Fund A and a loss of $500 with Fund B. You wouldn’t owe any tax on the gain, because you lost more than you gained. That amount can also help you reduce your taxable income.

Claim Your Capital Losses

The IRS allows you to claim your capital losses up to a certain amount and use them to offset your capital gains. A capital loss occurs when you sell an asset for less than what you paid for it. Be sure to claim any losses to help reduce your capital gains tax burden when you file your tax return.

Pay Attention to Your Income

The rate at which a long-term capital gain is taxed depends on your income for the year. Consider holding the asset until a year when your income might be lower if your income is right over the limit of a capital gains tax bracket.

Just a small change in your income can make a pretty significant difference. Someone making $41,000 in taxable income might not pay any long-term capital gains taxes at all, while someone with $42,000 in taxable income would pay 15% in long-term capital gains taxes.

Consider finding other ways to reduce your taxable income, such as looking for deductions you might qualify for, if you don't anticipate your income going down in the future. Slightly increasing your deductible contributions to a retirement account may reduce your taxable income enough to bring you down to a lower long-term capital gains tax rate.

Unusual Capital Gains Situations

While the short-term and long-term capital gains rules apply to many investments, there are a handful of exceptions.

Capital Gains on Mutual Funds

Capital gains apply slightly differently to mutual funds. Unlike other types of assets, you might be subject to capital gains taxes for your mutual fund holdings even if you don’t sell your shares.

Mutual fund companies must pass earnings on to shareholders in the form of distributions throughout the year. You’ll still have to report and pay capital gains taxes on them even if you reinvest your distributions back into the fund.

You’ll receive an IRS Form 1099-DIV if you invest in a mutual fund and receive distributions subject to capital gains taxes.

Capital Gains on Your Primary Residence

The IRS offers a capital gains exclusion to homeowners who are selling their primary residences. Be sure to take advantage of the exclusion amount when filing your taxes if you sell your home for more than you paid for it. You can exclude the first $250,000 (or $500,000 for married couples) of your capital gain from taxes if:

  • You owned the home for at least two of the past five years.
  • You owned the home and used it as your residence for at least two of the past five years.
  • You didn’t sell another home during the two years before the date of sale or didn’t take an exclusion from the sale.

Capital Gains on Collectibles

The tax rate on capital gains from the sale of collectibles, such as coins or art, is 28%.

Capital Gains on Depreciated Property

The IRS taxes unrecaptured Section 1250 gains at a rate of 25%. This section of the tax code applies to property you own that has depreciated in value over time, resulting in a tax break.

Capital Gains on Small Business Stock

You’ll be taxed at a rate of 28% if you sell qualified small business stock and receive a capital gain.

Net Investment Income Tax

You might also be subject to the net investment income tax (NIIT), depending on your annual income. This rule results in an additional 3.8% tax on certain investment income for single filers with modified adjusted gross incomes (MAGIs) of $200,000 or more, and married individuals filing jointly with MAGIs of $250,000 or more.

Article Sources

  1. Internal Revenue Service. "Topic No. 409 Capital Gains and Losses."

  2. Internal Revenue Service. "Rev. Proc. 2020-45," Page 8.

  3. Internal Revenue Service. “Rev. Proc. 2021-45," Pages 8-9.

  4. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments For Tax Year 2022."

  5. Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

  6. Internal Revenue Service. "Topic No. 701 Sale of Your Home."

  7. Internal Revenue Service. "Questions and Answers on the Net Investment Income Tax."