Most Americans are taxed on the income they earn through work. Those taxes are based on how much someone earns, with higher tax rates charged to higher amounts of income.
But taxes on investments aren’t handled the same way. The money someone makes from selling a house, a stock, or some other investment is called a capital gain. The tax rates for capital gains are different depending on how long the investment was owned, the amount of investment income received, and how much the taxpayer makes in annual income.
Over the years, Congress has made several changes to how capital gains are taxed, from the tax rates themselves to what gets counted as a capital gain.
What are capital gains?
A capital gain or loss is the difference between the price paid for an asset and the price it was sold at. If you sell an asset for more than you paid for it, it becomes a capital gain. If the asset is sold for less than what was paid for it, then it is a capital loss. Assets can include homes, stocks, bonds, and other investments.
A capital gain or loss is classified as short- or long-term[1]. If someone sells an asset after owning it for a year or less, it is a short-term capital gain or loss. If the asset is sold after it’s been owned for more than a year, it is considered a long-term gain or loss.
According to the Congressional Research Service, about two-thirds of individual capital gains subject to tax are from selling corporate stock; the remainder is from property sales.
How are capital gains taxed?
Capital gains are taxed depending on the net capital gain in a year. The Internal Revenue Service (IRS) defines net capital gain as the difference between a taxpayer’s total long-term capital gains and total short-term capital losses.
| Tax filing status | 0% tax rate | 15% tax rate | 20% tax rate |
|---|---|---|---|
| Single | $0 to $40,400 | $40,401 to $445,850 | $445,851 or more |
| Married, filing jointly | $0 to $80,800 | $80,801 to $501,601 | $501,601 or more |
| Married, filing separately | $0 to $40,400 | $40,401 to $250,800 | $250,801 or more |
| Head of household | $0 to $54,100 | $54,101 to $473,750 | $473,751 or more |
Short-term capital gains are taxed as ordinary income. Long-term net capital gains are often taxed at rates lower than ordinary income. Most long-term capital gains are taxed at rates of 15% or less. The amount taxed for capital gains depends on the income of the taxpayer and their filing status.
Some assets including small business stocks, collectibles, and certain properties are taxed at rates higher than 20%[2].
Certain high-income earners are also subject to a net investment income tax of 3.8%[3]. For those taxpayers, the tax rate for capital gains is increased by 3.8% across the board.
How have taxes on capital gains changed over time?
Congress has changed the rules regarding capital gains and taxes several times. They have applied different rules for what is classified as a short- or long-term capital gain and how they are taxed.
For example, the definition for long-term gains has ranged anywhere from 12 months to five years within the last century.
Over the last 40 years, Congress has also changed the rules regarding the tax rates applicable to capital gains. The maximum tax rate on capital gains changes often with different administrations and economic conditions.
The current maximum rate of 20% plus the 3.8% net investment income tax is slightly lower than the rate between 2013 and 2017.
Who files tax returns for capital gains?
In 2019, about 26 million tax returns included some capital gains. The sum of reported net capital gains in 2019 amounted to about $865 billion.
Returns filed by those who make more than $1 million made up 62% of net capital gains reported to the IRS. The average tax return in this income group was about $1,100,000 in net capital gains. About 502,000 tax returns were filed for this income group.
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[1] Some exceptions to this include property acquired by gift or decedent or patent property.
[2] The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
[3] The IRS includes more details on what is included here: Questions and Answers on the Net Investment Income Tax | Internal Revenue Service (irs.gov)
