The profit you earn after selling an investment or an asset is called capital gain. But how much are you liable to pay on your profits? Find out in this blog post.
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Any profit you earn after selling an investment or an asset translates into capital gain, which is taxable by the federal government. When you realize gains, they are considered a part of taxable income. According to the federal tax bracket, if your gain crosses a certain amount, you become liable for a tax percentage. However, capital gain taxes are broken down into two categories – long-term and short-term capital gains. In this blog post, we will explain both short and long-term capital gain taxes to help you devise a selling strategy that keeps you in profit after you pay your tax.
Long-term Capital Gain
Long-term capital gains are taxed at a lower rate than ordinary income. Plus, the amount of money depends on how long you held the asset in your custody. Generally, you’ll either pay 0%, 15%, or 20% tax on capital gains for long-term investments. It’ll also depend on your annual taxable income. For this to happen, you will have to hold the asset for at least a year and a day.
When calculating withholding tax income, you’ll account for the day you sold the asset, not when you bought it. This means if you purchased as an asset on March 1st, 2022, your ownership started on March 2nd, 2022. But your one-year mark will hit on March 1st, 2022. Here is a breakdown of your taxable amount based on your status and income bracket for 2022.
| Status | 0% | 15% | 20% |
| Single | $41,625 | $41,675 to $459,750 | Over $459,750 |
| Married (joint filing) | $83,350 | $83,350 to $517,200 | Over $517,200 |
| Married (separate filing) | $41,675 | $41,675 to $258,600 | Over $258,600
|
| Head of house | $55,800 | $55,800 to $488,500 | Over $488,500 |
Short-Term Capital Gain
If you’ve held an asset or investment for less than or equal to one year, the profit on the asset will be considered a short-term capital gain. In the US, a short-term capital gain is treated under the ordinary income tax bracket, which means you might end up paying 37% tax. Here are short-term capital gain tax brackets for 2022.
| Tax Rate | Single | Married Filing Jointly | Married Separate Filing | Head of Household |
| 10% | Taxable income of $0 to $10,275 | Taxable income of $0 to $20,550 | Taxable income of $0 to $10,275 | Taxable income of $0 to $14,650 |
| 12% | $10,275 to $41,775 | $20,550 to $83,550 | $10,275 to $41,775 | $14,650 to $55,900 |
| 22% | $41,775 to $89,075 | $83,550 to $178,150 | $41,175 to $89,075 | $55,900 to $89,050 |
| 24% | $89,075 to $170,050 | $178,150 to $340,100 | $89,075 to $170,050 | $89,050 to $170,050 |
| 32% | $170,050 to $215,950 | $340,100 to $431,900 | $170,050 to $215,950 | $170,050 to $215,950 |
| 35% | $215,950 to $539,900 | $431,900 to $647,850 | $215,950 to $323,925 | $215,950 to $539,900 |
| 37% | $539,900 or more | $647,850 or more | $323,925 or more | $539,900 or more |
If you have trouble understanding long and short-term capital gain, you can always recruit a financial advisor to take care of your taxes.
What Capital Gain Tax Means to Investors?
Understanding capital gain is crucial for investors because it informs them about their federal and state government liability. Besides that, mastering capital gain taxes allow investors to take full advantage of them. For instance, you can negate your tax liabilities if your capital losses are greater than your capital gain despite selling your investment or assets at a profit.
Best financial planners know how to tackle taxes and minimize their payable amount. Sometimes, investors aren’t aware of tax laws and end up paying more than they should. If you happen to fall under this category, you should hire an investment advisor.
[1] https://www.forbes.com/advisor/taxes/capital-gains-tax/
[2] https://www.forbes.com/advisor/taxes/capital-gains-tax/