What is Capital Gains Tax? - 2023 - Robinhood (2024)

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When you profit from an investment, you should probably know how much goes to the government. Capital gains tax applies to both individuals and businesses. It's payable when a capital asset (e.g., stocks, bonds, real estate) is sold, and a gain is realized.

Capital gains fall into two categories: short-term and long-term. Short-term capital gains — profits on assets held less than one year — are taxed as ordinary income. For instance, if you’re in the 24% federal tax bracket, you’ll pay taxes at that rate, or even higher if the gain bumps you into the next tax bracket. Typically, long-term capital gains are treated more favorably. They’re “realized” when an asset is sold after being held for more than one year, and depending on your tax bracket, the long-term capital gains tax rate is either 0%, 15%, or 20%.

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Calculating capital gains tax is relatively straight-forward. Let’s assume an investor owns a capital asset (shares, bonds, property), and they decide to sell:

1. If the sales price is higher than their purchase price, then there is a potential capital gain. It's important to note that commissions and fees are included in the cost basis.
2. The next step is to determine how long the investor has held the asset.

• If they have owned the asset for less than one year, then they will need to pay capital gains tax at the same rate as normal income tax. Note: There are some exceptions to this rule, such as with collectibles (like stamps, coins, and baseball cards), which may be taxed at a higher rate.
• If the investor has held the asset for more than one year, then their profit will be taxed differently. The tax will now range from 0% to 20%, depending on the investor’s annual income. State taxes may vary.

Remember, capital losses may help offset capital gains. If an investor has lost money in the current year, or in previous years, then that may help offset against some gains. This can reduce how much the investor has to pay in taxes.

An investor who owns shares or property for one year or less before selling for a gain falls into this category. The gain is taxed the same as regular income.

For an individual, these rates are as follows for 2022 (taxes due spring 2023) and 2023 (taxes expected to be due in spring 2024):

Someone who holds stock or property for more than one year before selling for a profit will be deemed a long-term investor, and their tax rate might be significantly reduced.

For an individual, here's the breakdown of long-term capital gains tax rates for 2022 (taxes due spring 2023) and 2023 (taxes due spring 2024):

If a single person lives in a property and they sell it for a profit, then there is no tax on up to a $250,000 gain ($500,000 if married).

This capital gains tax exemption does not apply if the individual has not lived in the house (i.e., it’s an investment property), is living overseas, or has not owned or lived in the house for 2 years in a 5-year period preceding the sale date.

A homeowner who has already used their $250K / $500K CGT tax credit in the last two years will not be able to apply for the exemption.

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