How to Calculate Capital Gains and Losses on Your Tax Return

Profits from selling assets you own for more than a year are long-term capital gains. Those held for more than a year get more favorable tax treatment, and the lower your taxable income, the lower your long-term capital gains rate will be. The IRS says the net capital gains tax for most individuals is no higher than 15 percent. Here are the capital gains tax rates for the 2023 tax year.

0 percent capital gains rate: If your taxable income is less than or equal to $44,625 (single) or $89,250 (married filing jointly), you’ll pay 0 percent in capital gains tax.

15 percent capital gains rate: The 15 percent capital gains tax kicks in for moderate to high earners with taxable income of more than $44,625 but less than or equal to $492,300 for single filers; more than $89,250 but less than or equal to $553,850 for married couples filing jointly; more than $59,750 but less than or equal to $523,050 for head of household; or more than $44,625 but less than or equal to $276,900 for married people filing separately.

20 percent capital gains rate: The higher 20 percent capital gains rate is levied when your taxable income exceeds the thresholds set for the 15 percent capital gains rate.

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 22 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 $2,200 in taxes. In contrast, if you held that same stock for at least a year before selling it, you’d pay $1,500 because you now pay at the lower long-term capital gains tax rate. Your after-tax profit is $700 better by simply holding for more than a year.

The tax savings are even greater for high earners in the highest 37 percent tax bracket who are subject to a 20 percent long-term capital gains tax, Lee adds. That same $10,000 gain on an asset held for less than a year will cost $3,700 in taxes, compared to just $2,000 if you owned the stock for a year or more. “That’s a difference of $1,700,” he says.

Being a long-term holder of a stock or other financial assets is essentially a tax-reduction strategy.

“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 wealth management 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 from assets such as interest, dividends and capital gains. 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 have to pay.

“It’s a tax on investment income, so if you don’t have any investment income, you don’t owe the NIIT tax,” says Tim Steffen, director of advanced planning at Baird Private Wealth Management.

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.

Here’s a quick example of how the NIIT tax works: “As far as how much of your investment income is subject to the tax, it’s the lesser of two numbers,” says Steffen. “One is total investment income that you have, and the other is total income over $250,000 if you’re married. So if you have $260,000 of income, the most that would be subject to the NIIT tax is $10,000.” But if you only have $2,000 of investment income, then you only pay the 3.8 percent tax on the $2,000 (as that is the lower of the two numbers the IRS is looking at). In this example, you’ll pay the added tax on the $2,000, not the $10,000.

Real estate

The housing market stalled a bit in 2023 due to higher interest rates. Still, housing prices have risen 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. Last year, home prices rose at a 5.3 percent clip in large part due to low inventory. But many sellers with properties now worth more than $1 million as their principal residence for many years who sold were slapped with sizable capital gains tax bills. The reason: If you’re single, only the first $250,000 in profit is tax-free, and that number rises to $500,000 for married couples who file a joint tax return. With the type of appreciation the housing market has seen in some markets, those numbers don’t go a long way, financial advisers say.

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 extra gain beyond the IRS exemption will be taxed at the long-term capital gains rate of either 15 percent (for a tax hit of $37,500) or 20 percent (for a tax hit of $50,000), depending on your overall taxable income.

To minimize your capital gains on home sales, make sure you tally up your tax basis (your total cost of buying and owning a property) correctly. Your cost basis is used to calculate capital gains and includes not just your purchase price but also money spent on home improvements as well as fees paid at the time of closing. “So if you put an addition on the home, you’ve landscaped the property, or you put a new roof on the house, all of those things count towards your cost basis,” Steffen says. A higher cost basis reduces what you’ll have to pay in capital gains.

Second homes

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; therefore, when you sell, your profits are taxed as a capital gain, just as a stock is. So if 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 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 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

What do you do if you want to trim your capital gains taxes? 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, Steffen says. Think before you hit the sell button. Avoid the temptation to trade frequently like a day trader.

And, Lee 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.

“From a tax-planning perspective, that is an opportunity to harvest losses to reduce your tax liability,” Lee says.