Capital Gains & Your Taxes: A Brief (But Important!) Guide

Classic investments, like stocks, are not the only investments taxed by capital gains. Capital gains taxes can apply to any other property that acquires value over time. These taxes are calculated by subtracting the cost of the investment from the final selling price of said investment. This final amount is reported as capital gains. But, the final amount can be taxed at different rates depending on the investment type and the total monetary gain.

Below, we’re reviewing how capital gains taxes are determined and what methods you can use to reduce them.

Duration of the Investment

The amount of time you hold an investment can reduce the amount of taxes you ultimately pay. The IRS has established two investment types: short-term and long-term. Investment duration is calculated from the date of purchase to the date of sale. Over a year is considered long-term, while short-term is under a year.¹ Short-term capital gains are taxed at the same rate as the income on your paycheck. 

Long-term Capital Gains Tax Rates for 2024

The total tax amount will depend on a variety of factors, though the IRS taxes most individuals at a rate of zero to 15 percent.

This table shows the breakdown of your filing status, your taxable income, and the tax rate on long-term capital gains

A couple filing jointly with combined taxable income of $90,000 will pay a 0% tax rate on their long-term capital gains, a single person with the same income would pay a 15% rate, and an irrevocable trust or an estate with the same amount of income would pay a 20% tax rate on long-term capital gains.

Net investment income tax

Starting back in 2013, Congress introduced an additional 3.8% tax on "net investment income" (NII). This is essentially an extra 3.8% tax on dividends, capital gains, and interest earned on investments. This tax stacks on top of the capital gains tax rate and kicks in when your modified adjusted gross income is more than $200,000 when filing single and $250,000 when married filing joint. So for practical purposes the 15% and 20% capital gains taxes could be 18.8% ad 23.8% respectively.

Don't forget about state taxes

Each state has its own rules for how capital gains are taxed. In our great state of New Jersey, realized capital gains are taxed just like any other income you would earn. So if your income puts you in the 6.37% income tax bracket then you'll pay 6.37% in taxes on both short-term and long-term capital gains. For 2024 a New Jersey married couple filing jointly earning $300,000 would pay 15% federal capital gains tax + 3.8% NII + 6.37% NJ for a total tax rate of 25.17% on long-term capital gains.

What Isn’t Affected by Capital Gains? 

Certain types of property and accounts are not affected by capital gains taxes. If applicable, see if you can utilize these property and account types to maximize your investments.

Two general property types are unaffected by capital gains. The first is business property, including products. The second is anything you create as an individual. This could be a book you wrote or an invention you patented. 

Alternatively, specific retirement and education accounts, such as a Roth IRA, can help protect your investments from capital gains taxes. 

Offsetting Capital Gains

Investments may not always pay off. Sometimes, a market change results in your property going down in value. This reduction is also calculated on your taxes and is calculated into your capital gains taxes. This can lower your taxable income range.

For example, if you receive $100,000 from selling one investment, you would be taxed in the 15 percent range. However, if you lost $25,000 on another investment, this would drop your total income from investments to $75,000, which could place you beneath the 15 percent tax range. These reductions and gains can only be combined if they are the same type of investment, long-term or short-term and are sold in the same year.²

Like-Kind Exchanges

Capital gains taxes can be postponed by using the income to invest in a similar property type.³ However, make sure to consult the IRS website or your tax professional before moving forward on any like-kind exchange, such as a 1031 exchange, as the requirements and investment types have changed over the years.

Make sure you prepare to protect your investments from higher tax rates. And when selling an investment or even a piece of property, make sure to consult a financial advisor or IRS representative to help determine how much you could be taxed.