There are different rates applicable for long term and short term capital gain
There are different rates applicable for long term and short term capital gain

Whenever you sell your capital asset, it will result in a short term or long term capital gain. The tenure of holding of the asset will determine whether it is a short term or a long term capital gain. A capital asset could be real estate, stocks, jewelry, precious metal, and bonds. 

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It helps to hold a capital asset for more than a year to save on the capital gain tax.

Long term capital gain

Long term capital gain arises when you sell an asset after holding it for more than one year. The gain is taxed according to given thresholds for taxable income at 0%, 15%, or 20%. In rare cases, the gain is taxed at a rate that is higher than 20%.

Short term capital gain arises at the time of sale of an asset you have owned for less than one year. The short term capital gain will be taxed as your income and will be taxed as per the income tax bracket you fall into.

It is subject to the tax rates which is a part of the federal tax brackets with rates that range from 10% to 37%. However, long term gain is subject to a specific tax rate and it is more favorable than the regular income tax bracket. 

The net capital gain will be estimated on adjusted basis. It means the amount you paid for the asset, less depreciation and adding all the costs you incurred in the sale. If you have received the asset as a gift, you inherit the donor’s basis.

It is important to remember that the tax on long term capital gain will be lower than the tax on a short term capital gain. This is because the tax on long term gain is more favorable and you are rewarded for holding the asset for a longer period of time. Hence, you can reduce the capital gain tax by not selling the asset for a period of one year or more. There is a unique tax bracket for long term capital gain and these numbers change every year. 

Filing Status0% rate15% rate20% rate
SingleUp to $39,375 ($40,000)$39,376 to $434,55 ($40,000 to to $441,450)Over $434,550 ($441,450)
Head of householdUp to $52,750 ($53,600)$52,751 to $461,700 ($53,600 to $469,050)Over $461,700 ($469,050)
Married filing jointlyUp to $78,750 ($80,000)$78,751 to $488,850 ($80,000 to $496,600)Over $488,850 ($496,600)
Married filing separatelyUp to $39,375 ($40,000)$39,376 to $244,425 ($40,000 to $248,300)Over $244,425 ($248,300)

Short term capital gain tax

The short term capital gain will be taxed as ordinary income. For example, let us assume you have taxable income of $ 80,000 and you have $6000 from short term investment, the total income will be $86,000. Your tax on capital will be based on the same bracket as your ordinary income. 

Filing Status10%12%22%24%32%35%37%
SingleUp to $9,700 ($9,875)$9,701 -$39,475 ($9,876 -$40,125)$39,476 -$84,200 ($40,126 -$85,525)$84,201 – $160,725 ($85,526 -$163,300)$160,726 -$204,100 ($163,301 – $207,350)$240,101 -$510,300 ($207,351 – $518,400)Over $510,300 ($518,400)
Head of householdUp to $13,850 ($14,100)$13,851 -$52,850 ($14,101 -$53,700)$52,851 -$84,200 ($53,701 -$85,500)$84,201 – $160,700 ($85,501 – $163,300)$160,701-$204,100 ($163,301 – $207,350)$204,101 – $510,300 ($207,351 – $518,400)Over $510,300 ($518,400)
Married filing jointlyUp to $19,400 ($19,750)$19,401 -$78,950 ($19,751 -$80,250)$78,951 -$168,400 ($80,251 -$171.050)$168,401 – $321,450 ($171, 051 – $326,600)$321,451 -$408,200 ($326,601 – $414,700)$408,201 – $612,350 ($414,701 – $622,050)Over $612,350 ($622,050)
Married filing separatelyUp to $9,700 ($9,875)$9,701 -$39,475 ($9,876 -$40,125)$39,476 -$84,200 ($40,126 – $85,525)$84,201 – $160,725 ($35,526 – $163,300)$160,726 –  $204,100 ($163,301 – ($207,350)$204,101- $306,750 ($207,351- $311,025)Over $306,750 ($311,025)

There are different rates for the taxation of ordinary income. In some circumstances, a gain or some part of the gain can be taxed at a higher rate. It can happen because a part of the overall income might jump to the higher and different tax bracket after the addition of capital gain. If you fall in the tax bracket of 22% for income from salary, $9,600 will be taxable at the rate of 10% and an amount up to $ 39,475 will be taxable at the rate of 12%. The remaining income will be taxable at 22%. 

An understanding of short term and long term capital gain will help plan your finances better. It is important to consider the amount of tax liability you will have whenever you sell a property. Keep the tenure of holding in mind before making the final decision to sell. If you want to reduce the tax liability on capital gains, hold the property for more than one year.

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