A guide to capital gains tax

It’s not just a tax for rich people

Derek Silva

Derek Silva

Published February 8, 2020

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KEY TAKEAWAYS

  • You have a capital gain (or loss) when you sell a capital asset for more (or less) than you paid for it

  • Capital assets include investments and most personal property, such as your primary home

  • Short-term capital gains (owned one year or less) are taxed like ordinary income, but long-term capital gains (owned more than one year) have much lower tax rates

  • When you sell your home, you can exclude $250,000 of the sale price from capital gains tax ($500,000 for joint filers)

A capital gain results when you sell a capital asset for more than you paid for it. Capital assets include investments and most of your personal property, including your home. When you have capital gains, you have to pay taxes on them.

There are two types of capital gains and the tax rates your pay depend on how long you hold an asset before selling it. If you own a capital asset for one year or less before selling, it’s considered a short-term capital gain and your profit is included with your regular income. That means you pay the standard income tax rates, which range from 10% to 37%. If you own a capital asset for more than one year before selling, it’s a long-term capital gain. The Internal Revenue Service (IRS) taxes long-term gains differently, with rates ranging from 0% to 20%. Most individuals will not pay more than 15%.

Reporting capital gains on your taxes is a bit of a hassle, and will require you to complete at least two forms — Form 8949 and Schedule D — and attach them to your tax return. Selling certain types of assets will require you to file other forms. For more help filing, start with our guide to filing federal income taxes.

In this article

What is a capital asset?

Most of the property you own and use for personal purposes, as well as most investments, are capital assets.

Capital assets include the following:

  • Your home (primary residence)
  • Your personal car
  • Stocks, bonds, and other investments (but likely not retirement accounts)
  • Personal property, like clothes, furniture, and appliances
  • Valuables, like jewelry, gems, gold, silver, and other metals
  • Collectibles, such as an art, coin, or stamp collection
  • Real estate, as long as it isn’t a rental property or used for business

Business income, business property, and business inventory are not considered capital assets for your personal income taxes. This includes items you buy for the purpose of reselling. For example, if you buy an old camera at a yard sale for the express purpose of reselling it online, it isn’t considered a capital asset; it’s business inventory and if you have enough of this side income, you may need to pay self-employment tax (and estimated tax payments).

Capital assets do not include patents, copyrights, inventions, phone apps, or secret formulas. They also don’t include artwork, musical compositions, letters, literature, photographs, computer code, or similar items as long as you created them, they were made for you, or you were gifted them by the creator.

You may also see capital assets called fixed assets when talking about business property. The term property, plant, and equipment (PP&E) may also refer to a business's capital assets.

Capital gains tax on real estate

When you sell your home, you can exclude $250,000 ($500,000 if you file a joint return) from the sale price when calculating your capital gains from the sale. So if you sold your home for $300,000, your capital gains would only be $50,000 if your filing status is anything other than married filing jointly. A joint filer wouldn’t have any capital gains from this sale. To qualify for this exclusion, you must have owned the home for at least five years, and during the five years before selling your house, it must have been your primary residence for at least two years.

This home exclusion is also referred to as the Section 121 exclusion.

Short-term vs long-term capital gains

There are two types of capital gains: short-term and long-term. Which type you have determines the tax rates you pay.

Short-term capital gains

Short-term capital gains are any capital assets you own for one year or less before selling. Short-term gains are taxed as regular income by the IRS, which means they are added to your annual work income and you pay the regular federal income tax rates, which range from 10% to 37% in 2019 and 2020.

Long-term capital gains

Long-term capital gains are capital assets that you own for at least one year before you sell them. Long-term gains receive preferential tax treatment and you pay lower rates compared to standard income tax. The long-term capital gains tax rate is 20% or less.

There is one exception to note if you have any ownership or financial interest in a partnership. Starting in 2017, you must hold “applicable partnership interests” for more than three years before they’re considered long-term capital gains. An applicable partnership interest is ownership or other financial interest that you receive from a partnership in exchange for services you provided. For more information on which types of businesses this applies to, see IRS Publication 541.

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Capital gains tax rates in 2019 & 2020

First of all, the capital gains tax rates only apply to long-term capital gains. Short-term gains are taxed as ordinary income, just like the rest of your income for the year.

There are three capital gains tax brackets: 0%, 15%, and 20%. Similarly to the ordinary tax brackets, you only pay a given tax rate for the capital gains income that falls within that rate’s income bracket.

As an example of how the capital gains tax rates work, let’s say you’re a single-filer who is reporting $45,000 of capital gains income on your 2019 taxes (which most people file in early 2020). You would pay 0% tax on the first $39,375 of your gains, and then 15% tax on the remaining $5,625.

If you have more than a certain amount of capital gains income, you may also have to pay an additional net investment income tax (NIIT). The NIIT rates are also provided below.

2019 capital gains tax rates

Tax rateSingle tax filersMarried filing jointlyHead of householdMarried filing separately
0%Up to $39,375Up to $52,750Up to $78,750Up to $39,375
15%$39,376 to $434,550$52,751 to $461,700$78,751 to $488,850$39,376 to $244,425
20%More than $434,550More than $461,700More than $488,850More than $244,425

2020 capital gains tax rates

Tax rateSingle tax filersMarried filing jointlyHead of householdMarried filing separately
0%Up to $40,000Up to $80,000Up top $53,600Up to $40,000
15%$40,001 to $441,450$80,001 to $496,600$53,601 to $469,050$40,001 to $441,450
20%More than $441,450More than $496,600More than $469,050More than $441,450

Net investment income tax (NIIT)

Capital gains income above a certain threshold is also subject to a 3.8% tax called the net investment income tax, or NIIT. The NIIT applies to individuals, estates, and trusts.

The NIIT rate and income thresholds are the same for 2019 and 2020, but vary based on your filing status. The income threshold is also determined by your modified adjusted gross income (MAGI), not your total income. To determine your NIIT, use IRS Form 8960.

2019 & 2020 net investment income tax thresholds

Filing statusCapital gains income threshold
Single$200,000
Head of household (with qualifying person)$200,000
Married filing jointly$250,000
Married filing separately$125,000
Qualifying widow(er)$250,000

How to report capital gains on your taxes

Reporting capital gains on your tax return will most likely require you to fill out and attach at least two forms to your Form 1040 — the main tax return for individuals. (Learn more about how to fill out Form 1040.)

Different kinds of capital gains (or losses) also have their own tax forms that you need to complete. For example, you need to use Form 4684 to report capital losses due to casualty or theft. Make sure to attach all of the forms you use to your tax return.

Gather documents

Before you fill out any forms, gather all documents you have that list your capital gains and losses from the year. There are three common forms you may receive:

  • Form 1099-B, Proceeds from Broker and Barter Exchange, shows capital gains or losses from investments
  • Form 1099-S, Proceeds from Real Estate Transactions, shows capital gains or losses from selling property, including a home
  • Schedule K-1, Partner's Share of Income, Deductions, Credits, etc. for gains or losses you received from a partnership, S corporation, estate, or trust

It’s possible that you received a form other than one of the three above to report your capital gains. Just make sure you know the cost for which you initially acquired the capital asset and the sale price of the asset. You may also need to know the asset’s cost basis.

Your cost basis is the amount of your investment in an asset. For most people, basis is the same as the cost you originally paid for the asset. However, it may be different if you aren’t the sole owner, or if you inherit property. (In the case of inherited assets, you have a stepped-up basis, which is the asset’s value at the time you inherit it instead of its original purchase price.) Forms 1099-B and S should both report your basis.

Form 8949

Next, individuals should complete Form 8949, Sales and Other Dispositions of Capital Assets. This form simply asks you to list all of your capital gains and losses from the year. You don’t actually calculate your tax with this form; you only list your net gains and losses.

Form 8949 requires you to write what each capital asset is, the date you acquired it, the date you sold it, your purchase price (or basis, if different), your sale price, and your final net capital gain or loss.

There are also two columns for any adjustments you need to make to the sale price. Each type of adjustment has its own code, which you can find in the Form 8949 instructions. Three of the most common reasons for an adjustment are

  • You received a 1099-B or equivalent form that lists incorrect information, like the wrong sale price.
  • You received a 1099-B or equivalent form as a nominee for (meaning on behalf of) the actual owner of a property or asset.
  • You sold your primary home for a gain.

If you’re filing a joint return, you can either combine your gains and losses onto one form or fill out a Form 8949 for each spouse. Use as many copies of the form as necessary to include everything.

Schedule D

After filling out Form 8949, complete Form 1040 Schedule D, Capital Gains and Losses. Schedule D is where you actually calculate how much tax you owe on your capital gains. The form has three parts, spread across 22 lines. A lot of the information you need to complete Schedule D comes directly from Form 8949 or other similar forms. (The next section covers other forms you may need to help you complete Schedule D.)

Other forms you may need

Certain types of investments or capital gains (and losses) will require you to complete additional tax forms and attach them to your tax return. Some of the most common forms are listed below, and you will need to complete these to fill in your Schedule D:

  • Form 4797, Sales of Business Property (Part 1 is necessary for completing Schedule D)
  • Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains
  • Form 6252, Installment Sale Income
  • Form 4684, Casualties and Thefts
  • Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
  • Form 8824, Like-Kind Exchanges, for when you exchange a business or investment property for a similar property
  • Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, for investments you made, and any deferred gains you have, for investments in qualified opportunity zones

All of the forms above (with the exception of Form 8997) are mentioned directly in the line instructions of Schedule D, so you will know where to write the appropriate information. There are also a few worksheets in the instructions for Schedule D that you may need to fill out if you used one of the forms above. The instructions on the lines of Schedule D also direct you on when to fill out those worksheets.

Depending on where you live, you may also need to pay capital gains tax at the state level.

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