How to Calculate Capital Gains and Losses on Your Tax Return

Here’s a simple example to illustrate the benefit of holding shares longer than a year. Let’s say you’re a married couple with $150,000 in taxable income. Your marginal tax rate is 24 percent, which means that if you sell a stock you’ve owned for less than a year that nets you a $10,000 gain, you’ll pay $2,400 in taxes. In contrast, if you held that same stock for at least a year before selling it, you’d pay only $1,500 because you now pay at the lower long-term capital gains tax rate. So your after-tax profit is $900 better by simply holding for more than a year.

“If you hold for one year and one day, you get a completely different tax bill than if you held it for one less day,” says Hayden Adams, director of tax and financial planning for the Schwab Center for Financial Research.

Capital gains from stock sales are usually shown on Form 1099-B sent to you by your broker, bank or fund company.

Net investment income tax

The tax hit is even bigger on high earners who also have hefty investment income. If your modified adjusted gross income (MAGI) tops $200,000 (single), $250,000 (married filing jointly) or $125,000 (married filing separately), you may also owe a 3.8 percent net investment income tax, or NIIT, on top of capital gains you already have to pay. “That often comes as a big surprise to a lot of people,” Genter says.

This surtax was put in place in 2013 to help fund the Affordable Care Act. If there’s a silver lining, it’s that the 3.8 percent add-on tax applies only to the lesser of your total net investment income or the portion of your MAGI that goes over the income threshold for your filing status. And it doesn’t apply to gains on the sale of your personal residence.

Real estate

No doubt it was a seller’s market in 2021. Housing prices have been rising steadily since the pandemic began as people seek more space and better locations, pushing the median price of homes well into the seven-figure range in many cities from coast to coast. But many sellers who have owned those properties as their principal residence for many years were slapped with sizable capital gains tax bills. The reason: If you’re single, only the first $250,000 in profit is tax-free, with that number rising to $500,000 for married couples who file a joint tax return. “With the type of appreciation we have seen in some markets, those numbers don’t go a long way,” Genter says.

Indeed, when homes are selling for millions of dollars, the net profit on a home sale can far exceed the tax-free exemptions the IRS offers.

“If you’re married and bought a home for $500,000 more than a year ago and you sell it for $1 million, there’s no tax; your $500,000 profit is tax-free,” Milan explains. “But if you sold it for $1.25 million, you’ll have a capital gain of $250,000.” That large gain will then be taxed at the long-term capital gains rate of 15 percent or 20 percent, depending on your overall taxable income.

Second home

Tax savings are harder to come by when you own a second home, such as a vacation home at the beach or ski slopes. The IRS treats second homes as a capital asset, and therefore, when you sell, your profits are taxed as a capital gain, just as a stock is. So if you’re not wealthy and you bought a vacation home for $500,000 and sold it two years later for $600,000, you’ll most likely pay a 15 percent long-term capital gains tax on your $100,000 profit. Your tax hit would be $15,000.

Precious metals

If you’ve been trying to offset the ravages of spiking inflation and have bought and sold assets such as gold and silver and other precious metals, you’re looking at a 28 percent capital gains tax on gains — not the normal 20 percent top tax rate for stocks. The reason: The IRS treats gold and silver as “collectibles” and slaps a 28 percent capital gains rate on profits. The same 28 percent capital gains rate also applies to profits on exchange-traded funds (ETFs) that invest in physical gold and silver as well as art and rare coins.

Tax-saving tips

So what do you do if you want to trim your capital gains tax in 2022? Schwab’s Adams offers some tips: If possible, hold on to assets beyond the one-year threshold, so you can get the more favorable tax treatment of long-term capital gains. Think before you hit the sell button. “It’s really easy to trade today,” he says. “Click, click, click and you’re done. But think before you sell to minimize taxes.”

And, he says, you don’t always have to sell your winners. Selling a stock at a loss can save you in taxes. You can offset any amount of capital gains with losses. If you have more gains than losses, you can deduct up to $3,000 of those losses from your income. And if you have more than $3,000 in capital losses, you can carry over the rest of your losses for future years.

“Take the time to strategize,” Adams says.

Adam Shell is a freelance journalist whose career spans work as a financial market reporter at USA Today and Investor’s Business Daily and an associate editor and writer at Kiplinger’s Personal Finance magazine.