What Is the Capital Gains Tax After One Year?

When you sell an asset like stocks or real estate for more than you paid, the profit is a capital gain. This gain is subject to taxation, but the amount you owe depends on how long you owned the asset before selling it. The length of time you hold an asset determines its classification as either long-term or short-term, which has direct tax implications.

Differentiating Long-Term and Short-Term Gains

The holding period of an asset is the factor that separates capital gains into two categories. A long-term capital gain comes from selling an asset that you have owned for more than one year. A short-term capital gain results from the sale of an asset owned for one year or less. This distinction directly impacts the tax rate applied to your profit.

To correctly determine the holding period, you begin counting from the day after you acquire the asset up to and including the date you sell it. For instance, if you purchased a stock on April 1, 2023, your holding period would start on April 2, 2023. To qualify for long-term capital gains treatment, you would need to sell that stock on or after April 2, 2024.

The tax code’s preferential treatment for long-term gains is designed to encourage long-term investment over short-term speculation. By holding onto assets for more than a year, investors can benefit from lower tax rates.

Long-Term Capital Gains Tax Rates

For 2024, long-term capital gains are taxed at three federal rates: 0%, 15%, or 20%. The specific rate an individual pays is determined by their taxable income and filing status, such as Single, Married Filing Jointly, or Head of Household. These rates are lower than the ordinary income tax rates that apply to short-term gains.

For the 2024 tax year, the 0% rate applies to taxpayers with taxable income up to $47,025 for single filers, $63,000 for heads of household, and $94,050 for those married filing jointly. The 15% rate is for individuals with taxable income between $47,026 and $518,900 if single, between $63,001 and $551,350 for heads of household, or between $94,051 and $583,750 if married filing jointly. The 20% rate applies to taxpayers with incomes exceeding those upper thresholds.

Higher-income taxpayers may also be subject to the Net Investment Income Tax (NIIT). This is an additional 3.8% tax applied to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds certain thresholds. The MAGI thresholds are $250,000 for married couples filing jointly, $200,000 for single filers, and $125,000 for those married filing separately.

Calculating Your Capital Gain

To determine the taxable profit from an asset sale, you must calculate the capital gain or loss. The formula is the asset’s sale price minus its adjusted basis.

The sale price is the gross amount you receive from the sale, minus any expenses incurred during the sale, such as brokerage fees or commissions. For example, if you sell a stock for $10,000 and pay a $50 commission, your sale price for tax purposes is $9,950.

The other side of the equation is the asset’s basis, which starts with its original cost, including any initial fees. This figure can be modified over time, creating an adjusted basis. For real estate, adjustments that increase basis include the cost of capital improvements, such as adding a new room, which are distinct from simple repairs.

For stocks and mutual funds, the basis is adjusted for certain events. Reinvested dividends increase your basis because you are using post-tax money to purchase additional shares. A stock split requires you to reallocate your original basis across a larger number of shares, resulting in a lower basis per share.

Special Considerations for Specific Assets

While the standard capital gains rules apply broadly, certain assets have unique tax treatments, including a primary residence, collectibles, and certain small business stock.

One of the most widely used provisions is the primary home sale exclusion. This rule allows eligible taxpayers to exclude a substantial amount of gain from the sale of their main home. An individual can exclude up to $250,000 of gain, and for married couples filing a joint return, the exclusion doubles to $500,000. To qualify, you must have owned and lived in the home as your principal residence for at least two of the five years leading up to the sale.

Gains from the sale of collectibles are taxed differently than other long-term gains. Assets like art, antiques, stamps, or precious metals are subject to a maximum federal tax rate of 28%. This higher rate applies even if the asset was held for more than one year.

A more specialized provision relates to Qualified Small Business Stock (QSBS). The stock must be from a domestic C corporation with gross assets of no more than $50 million at the time the stock was issued. For QSBS acquired after September 27, 2010, and held for more than five years, an investor may be able to exclude 100% of their federal capital gains. The amount of gain that can be excluded is limited to the greater of $10 million or 10 times the adjusted basis of the stock.

Reporting Gains on Your Tax Return

You must report your capital gains and losses to the IRS on your federal income tax return using Form 8949 and Schedule D.

You begin by listing the details of each asset sale on Form 8949, Sales and Other Dispositions of Capital Assets. For each transaction, you will report the asset’s description, acquisition date, sale date, sale price, and cost basis. This form is where you formally document the calculations for each gain or loss, separating them into short-term and long-term categories.

The totals from Form 8949 are carried over to Schedule D, Capital Gains and Losses. Schedule D consolidates your short-term and long-term transactions to determine a net figure for each. The final net gain or loss from Schedule D is then transferred to your main tax form, Form 1040, to be included in your overall income.