Capital Gains Taxes 2024: What You Need to Know

Capital gains taxes can be a complex and confusing topic, but don't worry, we've got you covered.

In 2024, the long-term capital gains tax rate for most taxpayers will remain at 0%, 15%, or 20%, depending on their income level. This is a relatively unchanged landscape from previous years.

The IRS sets a specific threshold for taxable income, and if you fall below that threshold, you might be eligible for a 0% tax rate. This is a great incentive for investors to hold onto their assets for the long haul.

Taxpayers with higher incomes will face a higher tax rate, up to 20%. This is because the government relies on capital gains taxes to help fund public services and infrastructure.

Capital gains can be categorized into two main types: short-term and long-term. Short-term capital gains occur when you sell an asset within a year of buying it, while long-term gains happen when you hold onto an asset for more than a year.

If you're a day trader or someone who frequently buys and sells securities online, understanding the distinction between short-term and long-term gains is crucial for your investment strategy. This is because both types of gains must be reported on your annual tax return.

Here's a quick breakdown of the two types of capital gains:

A capital gain can occur from the sale of almost any type of asset you own, including investments like stock, bonds, or real estate.

These can include items purchased for personal use, such as furniture or a boat.

Investments like stock, bonds, and real estate are examples of capital assets that can result in a capital gain.

You can also have a capital gain from selling personal items, like a boat or furniture, for more than their original price.

Short-term capital gains are realized on assets sold after holding them for one year or less. This is a key distinction from long-term gains, which are realized on assets sold after holding them for more than one year.

Short-term gains must be reported on your annual tax return, and understanding the distinction between short-term and long-term gains is crucial for day traders and others who trade securities online. They should consider how these gains will impact their tax obligations.

You have a short-term capital gain if you sell an asset for more than its purchase price, and you've held it for one year or less. This can happen with investments like stocks, bonds, or commodities.

Here's a breakdown of the key points about short-term capital gains:

A short-term capital gain is a taxable event, meaning you'll need to report it on your tax return and pay any applicable taxes.

A net gain is essentially the profit you make from selling an asset, but it's a bit more complicated than that. The IRS defines a net capital gain as the amount by which a net long-term capital gain exceeds a net short-term capital loss.

This means that if you sell an asset for more than you paid for it, you've made a capital gain, and if you sell an asset for less than you paid for it, you've made a capital loss. The IRS looks at these gains and losses over the years to determine your net capital gain.

The IRS taxes individuals on capital gains under certain circumstances, and the tax rate may be lower than the ordinary income tax rate.

Tax rates for capital gains can be complex, but understanding the basics is key to making informed investment decisions. The tax rate on most net capital gain is no higher than 15% for most individuals in 2023, but there are exceptions where capital gains may be taxed at rates greater than 20%.

To qualify for the 0% capital gains tax rate, your taxable income must be less than or equal to $44,625 for single filers, $89,250 for married filing jointly, and $59,750 for head of household. If your income exceeds these thresholds, you'll be subject to the 15% tax rate.

Here are the tax rates and maximum taxable incomes for 2024 and 2025:

Tax rates for capital gains can be complex, but understanding them is crucial for investors. The tax rate on most net capital gain is no higher than 15% for most individuals.

Net capital gains are taxed at different rates depending on overall taxable income. If your taxable income is less than or equal to $44,625 for single and married filing separately, or $89,250 for married filing jointly and qualifying surviving spouse, the capital gains rate is 0%.

However, if your taxable income exceeds these thresholds, the capital gains rate increases to 15%. For example, if you're single and your taxable income is more than $44,625 but less than or equal to $492,300, the capital gains rate is 15%.

There are some exceptions where capital gains may be taxed at rates greater than 20%. These include the taxable part of a gain from selling section 1202 qualified small business stock, which is taxed at a maximum 28% rate.

Here's a breakdown of the capital gains tax rates for 2024 and 2025:

Stocks, bonds, and cryptocurrency, including NFTs, are eligible for lower long-term capital gains tax rates. These assets can qualify for a 0% or 15% tax rate if held for a certain period.

Homes and household furnishings, vehicles, collectibles, and fine artworks are also eligible for lower rates. However, business inventory, real estate used by your business or as a rental property, and certain types of property like copyrights, patents, and inventions are not eligible.

Some assets, like jewelry, are eligible, but others, like literary or artistic compositions, are not. It's worth noting that assets held in tax-advantaged accounts, such as an IRA or 401(k), avoid capital gains taxes on the sale of an asset.

Here's a summary of eligible and ineligible assets:

If you sold a house the previous year, you may be able to exclude a portion of the gains from that sale on your taxes.

To qualify, you must have owned your home and used it as your main residence for at least two years in the five-year period before you sell it.

You also must not have excluded another home from capital gains in the two-year period before the home sale.

If you meet those rules, you can exclude up to $250,000 in gains from a home sale if you’re single, and up to $500,000 if you’re married filing jointly.

This exclusion can save you a significant amount of money on taxes, especially if you've lived in your home for a long time.

When you have capital gains, you'll need to report them on your taxes. Report most sales and other capital transactions on Form 8949, Sales and Other Dispositions of Capital Assets, then summarize capital gains and deductible capital losses on Schedule D (Form 1040).

If you have a taxable capital gain, you may be required to make estimated tax payments. For this, refer to Publication 505, Tax Withholding and Estimated Tax, for more information.

You'll need to make sure you're making timely estimated tax payments to avoid penalties. Estimated tax payments can be made quarterly, and you can refer to Publication 505 for the due dates and other details.

When reporting your capital transactions, it's essential to know where to send the information. Report most sales and other capital transactions on Form 8949, Sales and Other Dispositions of Capital Assets.

You'll also need to summarize your capital gains and deductible capital losses on Schedule D (Form 1040).

Estimated Payments can be a complex topic, but don't worry, I've got you covered. If you have a taxable capital gain, you may be required to make estimated tax payments.

Tax authorities take estimated payments seriously, and you'll want to refer to Publication 505, Tax Withholding and Estimated Tax, for more information.

Holding onto an asset for a longer period can significantly impact your tax bill. If you hold an asset for more than a year, you may qualify for the long-term capital gains tax rate, which is generally lower than the short-term capital gains rate.

This can save you a substantial amount of money. For example, if you use a capital gains tax calculator, you can see how much you could save by holding onto an asset for longer.

The IRS taxes capital gains at the federal level, and some states also tax capital gains at the state level. The tax rate you pay on your capital gains depends in part on how long you hold the asset before selling.

If your capital losses exceed your capital gains, you can claim up to $3,000 of the excess loss to lower your income, or $1,500 if married filing separately. This can be done on line 7 of your Form 1040 or Form 1040-SR.

You can also carry forward the excess loss to later years, using the Capital Loss Carryover Worksheet found in Publication 550 or in the Instructions for Schedule D (Form 1040) PDF. This can be a helpful strategy for investors who want to reduce their tax liability over time.

Any remaining losses beyond the $3,000 deduction can be carried forward to offset future income, allowing you to take advantage of the tax benefits of capital losses even in years when you have no capital gains.

You can claim up to $3,000 of your excess capital losses against your income, or $1,500 if you're married filing separately. This limit applies to the amount of excess loss you can claim to lower your income.

If your net capital loss is more than the allowed limit, you can carry the loss forward to later years. You can use the Capital Loss Carryover Worksheet to figure out how much you can carry forward.

The carryover limit is based on your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses. This is the amount that determines how much of your excess loss you can claim in the current year.

You can carry forward any remaining losses beyond the $3,000 deduction to offset future income, up to $3,000 per year.

If your income is $47,025 or less, you won't pay capital gains tax in the tax year 2024.

There's no specific age that exempts you from paying capital gains tax, so it's not just about being young or old.

Investment income is subject to a special tax, the Net Investment Income Tax (NIIT), which is 3.8% of the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the IRS thresholds.

You can have investment income without working, but it's still considered unearned income and is taxed differently than regular income. The NIIT applies to individuals, estates, and trusts, and the thresholds vary based on your tax filing status.

The NIIT is levied on interest, dividends, capital gains, rental income, and other types of investment income, but not on earned income. If you have a high income and significant investment income, you may be subject to the NIIT.

Here are the IRS thresholds for the NIIT:

You can use capital losses to offset capital gains, reducing your overall tax bill. If you have more losses than gains, you can deduct up to $3,000 of the excess against other types of income, such as wages.

Net Investment Income is a type of income that's taxed differently than earned income. It includes interest, dividends, and capital gains, which are considered passive income.

The Net Investment Income Tax (NIIT) applies to individuals with significant investment income, and it's levied at a rate of 3.8%. This tax only applies to U.S. citizens and resident aliens, not nonresident aliens.

The NIIT threshold varies based on your tax filing status, with the highest threshold being $250,000 for married filing jointly. If your modified adjusted gross income (MAGI) exceeds this threshold, you may be subject to the NIIT.

Here are the NIIT thresholds for different tax filing statuses:

If you have net investment income that exceeds the NIIT threshold, you'll owe taxes on the lesser of the two amounts. For example, if you have $75,000 in net investment income and your MAGI is $275,000, you'd owe taxes on $25,000 ($275,000 - $250,000) at a 3.8% tax rate.

Mutual funds distribute realized capital gains to shareholders, typically right before the end of the calendar year.

These distributions are detailed on a 1099-DIV form, which shows the amount of capital gain and whether it's short-term or long-term.

Shareholders who receive a distribution will get this form, which is an important document to keep track of for tax purposes.

Undistributed long-term capital gains are reported to shareholders on Form 2439, which is another important form to be aware of.

The net asset value (NAV) of a mutual fund drops by the amount of the distribution, but this doesn't affect the fund's total return.

If you're not a financial expert, managing your investments can be overwhelming. Consider a robo-advisor, which can manage your investments for you automatically.

Robo-advisors often employ smart tax strategies, including tax-loss harvesting, as a part of the service. This can help minimize your tax liability and maximize your returns.

Robo-advisors can be a convenient option, especially for those who are new to investing. You can get started with a trusted financial advisor for free with NerdWallet Advisors Match.