One of the draws of investing is the money you could potentially make in a relatively shorter amount of time than earning it through a part-time or full-time job. But what some investors may initially neglect to take into account is the fact that investment gains mean investment income, and investment income means taxes on investment income. A financial advisor could help you create a tax plan to maximize your investments. Let’s break down the tax rates for your capital gains in 2021.
What Are Capital Gains?
Capital gains refers to the money that an investor makes as the profit from selling one or more of their investments or assets. Making a profit means the investor now has income, of course, so this must be factored in when filing taxes. When an investor realizes a capital gain, any proceeds will be considered taxable income.
Capital gains vary depending on how long an investor had owned the asset before selling it. Long-term capital gains come from assets held for over a year. Short-term capital gains come from assets held for under a year.
Based on filing status and taxable income, long-term capital gains for tax year 2021 will be taxed at 0%, 15% and 20%. Short-term gains are taxed as ordinary income.
Capital Gains Tax Rates for 2021
Long-term capital gains tax rates for 2021 are as follows:
Long-term Capital Gains Tax Rates for 2021
Rate Single Married Filing Jointly Married Filing Separately Head of Household 0% $0 – $40,400 $0 – $80,800 $0 – $40,400 $0 – $54,100 15% $40,401 – $445,850 $80,801 – $501,600 $40,401 – $250,800 $54,101 – $473,750 20% $445,850+ $501,600+ $250,800+ $473,750+
In 2021, capital gains tax rates for short term capital gains depend on income tax brackets, which also factor in filing status.
For 2021, short-term capital gains tax rates are as follows:
Short-Term Capital Gains Tax Rates for 2021
Rate Single Married Filing Jointly Married Filing Separately Head of Household 10% $0 – $9,950 $0 – $19,900 $0 – $9,950 $0 – $14,200 12% $9,951 – $40,525 $19,901 – $80,050 $9,951 – $40,525 $14,201 – $54,200 22% $40,526 – $86,375 $81,051 – $172,750 $40,526 – $86,375 $54,201 – $86,350 24% $86,376 – $164,925 $172,751 – $329,850 $86,376 – $164,925 $86,351 – $164,900 32% $164,926 – $209,425 $329,851 – $418,850 $164,926 – $209,425 $164,901 – $209,400 35% $209,426– $523,600 $418,851 – $628,300 $209,426 – $314,150 $209,401 – $523,600 37% $523,601+ $628,301+ $314,151+ $523,601+ How Are Capital Gains Calculated and Reported?
To calculate capital gains, you’ll need your basis, or the cost of the asset when you paid for it.
Gains aren’t a guaranteed possibility, however. Investors may incur capital losses, meaning that the basis amount was more than the amount they eventually sold the asset for. Capital losses can be used to offset capital gains on taxes, but they must first offset capital gains of the same type.
Taxpayers who make sales during the tax year will have to report their gains and/or losses to the IRS on Form 1040, Schedule D, “Capital Gains and Losses.” They must first list all sales that result in these gains or losses on Form 8949, “Sales and Other Dispositions of Capital Assets.”
Bottom Line
Capital gains can be tricky, especially if you wait too long to understand how they implicate your financial situation at tax time. But knowing how long you will hold assets before selling, what the purchase and sales prices could be, as well as your tax filing status and income bracket can help you calculate how much you could owe in taxes.
Tips for Investors
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Need help with finding a financial advisor? SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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You might also be interested in signing up for a robo-advisor. Many robo-advisors offer tax-loss harvesting, which sells investments that are hurting your portfolio and helps offset what you earn from the gains. Robo-advisors aren’t necessarily right for everyone, but if you’re starting your investment journey or you don’t have complicated assets, you may want to give it a try. If you’re unsure, find one that offers you the chance to talk to a financial professional if you have questions about your specific needs. Not all robo-advisors offer this perk, but some do, usually for a fee.
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