Capital gains are profits you make when you sell an asset such as land, a business, stocks or art. Capital gains you make during the year are reported as income on your tax return. They’re considered short-term if you owned the asset for less than a year, while they’re considered long-term if you owned it for more than a year. Federal capital gains tax does not include state capital gains tax.
Capital gains are taxed separately by the IRS and the state you live in.
How Capital Gains Tax Works
Short-term capital gains are usually taxed at the same rate as the rest of your income. Long-term capital gains are taxed at a percentage rate from 0 to 20 percent based on your income and filing status. Capital gains tax rates for long-term assets are usually less than those for short-term assets.
State capital gains tax is separate from and in addition to federal capital gains tax. Historically, California’s capital gains tax rates are the highest. North Dakota has the lowest. Nine states have no capital gains tax at all. They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Capital Gains Tax Exception
When you sell your home, in most cases, you do not have to pay capital gains tax on the profit. To qualify for this exemption, the home has to be your primary residence for at least two out of the last five years. Additionally, you can only claim this exemption once every two years.
Capital Gains Tax Rates 2018
While some states’ rates have gone up a bit, nothing changed in federal capital gains taxes for the 2018 tax year. The definitions of short- and long-term assets remain the same. Short-term capital gains are still taxed according to your tax bracket along with your earned income, and long-term rates are still capped at 20 percent. Check your state’s capital gains tax rate on your state’s website.
Reporting Capital Gains Tax
Figure your taxable capital gains on IRS Schedule D (Form 1040). As you fill out this three-part worksheet, the instructions may direct you to fill out another form -- Schedule 1 (Form 1040) -- and transfer certain line items from Schedule 1 to Schedule D. Any amount you enter on Line 22 of Schedule 1 is what you'll add to Line 6 of your 1040 as part of your total income.
Using Capital Gains Tax Calculators
Capital gains tax calculators are available online to help you figure out how much federal and how much state capital gains tax you’ll have to pay. You’ll need to know the asset’s initial value, what you sold it for and how long you owned it. You’ll also have to enter your city, state, income and filing status.
The calculator gives you both a total and a breakdown of federal and state taxes. Be sure the calculator you’re using is for the tax year you want to number crunch.
- Tax Law for Selling Real Estate - TurboTax Tax Tips & Videos
- Motley Fool: Your Guide to Capital Gains Taxes in 2018
- Realized: Capital Gains Tax Rates by State
- SmartAsset: Capital Gains Tax Calculator
- Tax Policy Center: How Are Capital Gains Taxed?
- IRS: Form 1040 (2018)
- IRS: 2018 Schedule D (Form 1040)
- IRS: 2018 Schedule 1 (Form 1040)
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business in addition to writing for business and financial publications such as Budgeting the Nest, PocketSense and Zacks.