All of the investments you own are considered capital assets in the eyes of the IRS, including homes, stocks, bonds and more.

When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. An asset’s basis is its original cost to the owner, generally.

Capital gains are the profits you make from selling these investments. In most cases, you’re required to report a capital gain on your federal income tax return.

The amount of capital gains tax you pay depends on how long you held onto the asset before selling it.

Short-Term vs. Long-Term Capital Gains Tax

Capital gains and losses are classified in two ways:

  1. Short-term – If you hold the asset for one year or less.
  2. Long-term – If you hold the asset for more than one year before you sell it.

Short-term capital gains don’t benefit from a special tax rate. They are taxed at ordinary income tax rates, such as wages or salary. The rate you pay depends on your filing status and total taxable income for the year.

Long-term capital gains (profits you make on selling assets you’ve held for more than 365 days) are taxed at preferential rates, meaning you can benefit from a reduced tax rate. The tax you pay on assets held for more than a year and sold at a profit varies according to a rate schedule based on income thresholds.

In 2020, long-term capital gains tax rates are either 0%, 15% or 20% for most assets. Short-term capital gains tax rates, however, correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).

What is the Capital Gains Tax Rate?

The short-term capital gains tax rate is:

Rate Single Filers Heads of Household Married Filers
10% $0-$9,875 $0-$14,100 $0-$19,750
12% $9,876-$40,125 $14,101-$53,700 $19,751-$80,250
22% $40,126-$85,525 $53,701-$85,500 $80,251-$171,050
24% $85,526-$163,300 $85,501-$163,300 $171,051-$326,600
32% $163,301-$207,350 $163,301-$207,350 $326,601-$414,700
35% $207,351-$518,400 $207,351-$518,400 $414,701-$622,050
37% $518,401 or more $518,401 or more $622,051 or more
  Standard Deduction:
$12,400		 Standard Deduction:
$18,650		 Standard Deduction:
$24,800
Source: Business Insider

The long-term capital gains tax rate is:

Year Tax Rate Single Married Filing Jointly Married Filing Separately Head of Household
2020 0% < $40,000 < $80,000 < $40,000 < $53,600
2020 15% $40,000 – $441,450 $80,001 – $496,600 $40,001 – $248,300 $53,601 – $469,050
2020 20% > $441,450 > $80,800 > $248,300 > $469,050
2021 0% < $40,400 < $80,800 < $40,400 < $54,100
2021 15% $40,401 – $445,850 $80,800 – $501,600 $40,400 – $250,800 $54,100 – $473,750
2021 20% > $445,850 > $501,600 > $250,800 > $476,750
Source: Business Insider

As you can see, the capital gains tax rate will be lower for most people if they realize a capital gain after more than one year.

For example, suppose you bought 200 shares of a stock at $50 per share and sold them at $100 per share. Your regular income from earnings is $100,000 a year and you are part of a married couple that files jointly. The chart below compares the taxes you’d pay if you held and sold the stock in more than a year (long-term) and less than a year (short-term).

Capital Gains Tax: Long-term vs. Short-term

Transactions and consequences Long-term capital gain Short-term capital gain
Bought 200 shares @ $50 $10,000 $10,000
Sold 200 shares @ $100 $20,000 $20,000
Capital gain $10,000 $10,000
Capital gain $1,500 (taxed @ 15%) $2,200 (taxed @ 22%)
Profit after tax $8,500 $7,800
This chart shows how a married couple earning $100,000 a year could avoid $700 in taxes by waiting at least a year before selling shares that had appreciated $10,000.

How to Reduce or Avoid Capital Gains Tax

There are several ways to minimize or even avoid capital gains taxes.

To reduce your capital gains taxes, consider the long-term approach and hold your appreciated stock or other assets longer than one year prior to selling to avoid higher tax rates. Another consideration is investing capital gains in tax-advantaged retirement accounts, such as IRAs and 401(k)s, which allows your investments to grow on a tax-deferred or even tax-free basis.

Also, don’t forget you can use capital losses to offset capitals gains if you sell a different capital asset for less than its basis.

To avoid capital gains tax altogether, consider donating your appreciated asset directly to charity.

For example, instead of paying capital gains tax, you could open a donor-advised fund administered by a charitable sponsor, which allows for more giving potential and immediate tax savings.

Those savings can then be directed to important programs and initiatives that align with your philanthropic passions.

By gifting appreciated assets into a donor-advised fund, you not only avoid the capital gains tax you would have owed, but, if you itemize deductions, you can also claim a charitable deduction for the donated stock’s fair market value.

The result is leveraging your contribution for a bigger financial impact in your community while also securing a better tax break. In other words, your charitable investments and assets go much further.

Learn More

The San Diego Foundation’s charitable giving experts simplify the process of contributing stock and other appreciated securities to meet your personal philanthropic goals. To donate capital assets or learn more about donor-advised funds and tax benefits, contact our Development & Stewardship team.