Capital Gains Tax Increase: What You Need to Know

A capital gain is the profit realized from selling an asset for more than its original purchase price. This profit is a form of taxable income, and potential changes to capital gains tax rates have become a prominent topic. This article explains the fundamentals of capital gains tax, details proposed changes, and outlines strategies for managing its impact.

Understanding Capital Gains Taxation

Capital gains are categorized into two types based on how long an asset is owned, which influences the tax rate. Short-term capital gains arise from selling assets held for one year or less. These gains are taxed at an individual’s ordinary income tax rates, which range from 10% to 37%, the same rates that apply to wages or salary.

Conversely, long-term capital gains result from selling assets owned for more than one year. This longer holding period is incentivized through preferential tax treatment with rates lower than ordinary income rates. Common assets subject to capital gains tax include stocks, bonds, mutual funds, investment real estate, collectibles, and valuable personal items.

Details of the Tax Increase

Proposals have been introduced that would alter the long-term capital gains tax structure for high-income earners. One proposal suggests increasing the top federal long-term capital gains rate from 20% to as high as 39.6% for individuals with income exceeding $1 million. This change would align the top capital gains rate with the highest ordinary income tax bracket, removing preferential treatment for their investment profits.

For the 2025 tax year, the long-term capital gains tax rates are 0%, 15%, or 20%, depending on taxable income. For single filers, the 0% rate applies to income up to $48,350, the 15% rate applies to income from $48,351 to $533,400, and the 20% rate applies to income above $533,400. For married couples filing jointly, the 0% threshold is $96,700, the 15% bracket extends from $96,701 to $600,050, and the 20% rate applies to income over that amount.

An additional component of investment taxation is the Net Investment Income Tax (NIIT). This is a 3.8% tax on investment income for individuals with a modified adjusted gross income (MAGI) above certain thresholds. These thresholds are $200,000 for single filers and $250,000 for married couples filing jointly. The NIIT applies to both short-term and long-term capital gains, effectively adding to the total tax rate for those who exceed the income limits.

Calculating the Tax on an Asset Sale

The first step in calculating the tax on an asset sale is to determine the cost basis. The cost basis is the original value of an asset for tax purposes, which includes the purchase price plus any associated costs like commissions or fees. For example, if you purchased 100 shares of stock for $50 per share and paid a $10 commission, your total cost basis would be $5,010.

Once the cost basis is established, the next step is to calculate the realized gain. This is the difference between the sale price of the asset and its cost basis. If you sold the 100 shares of stock for $7,000, subtracting the $5,010 cost basis from the $7,000 sale price results in a realized capital gain of $1,990.

The final step is to apply the correct tax rate to the realized gain. The rate depends on whether the gain is short-term or long-term and your total taxable income for the year. Using the previous example, if the $1,990 gain was long-term and your total taxable income placed you in the 15% capital gains bracket, the tax owed on this specific sale would be $298.50 ($1,990 x 0.15).

Tax Planning Strategies

One strategy to manage capital gains is tax-loss harvesting. This involves selling investments that have decreased in value to realize a capital loss. These losses can then be used to offset capital gains. Should capital losses exceed gains in a given year, up to $3,000 of the excess loss can be used to offset ordinary income, with any remaining loss carried forward.

Gifting appreciated assets to individuals in lower tax brackets is an effective planning tool. When the recipient, such as a child or grandchild, sells the asset, the gain is taxed at their lower capital gains tax rate. The annual gift tax exclusion allows individuals to give up to $19,000 to any number of individuals without incurring gift tax.

Donating appreciated stock directly to a qualified charity offers a dual tax benefit. By donating the stock, you can avoid paying capital gains tax on the appreciation. You may also be able to claim a charitable deduction for the full fair market value of the stock, provided you have held it for more than one year.

Utilizing tax-advantaged retirement accounts like 401(k)s and IRAs is another way to manage taxes on investment growth. Investments within these accounts grow on a tax-deferred or, in the case of Roth accounts, tax-free basis. Taxes are paid upon withdrawal in retirement, and for a Roth IRA, qualified withdrawals are entirely tax-free.

Spreading a large capital gain over multiple years through an installment sale is another useful strategy. An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. This allows you to recognize the gain over several years, which can help you avoid an income spike that could push you into a higher tax bracket.