The tax reform bill ushered in plenty of changes; capital gains taxes saw a slight shift in income thresholds. Here’s what you need to know.
As most alert taxpayers know, a sweeping tax reform bill was put into law in January that affects most tax brackets, a pack of exemptions—both personal and business—as well as filing status, child credits, retirement plans, and how to book capital gains and losses on tax returns.
Much has been written about the new tax code, so here we’ll focus on capital gains.
If you sell a security, an investment, or another asset at a higher price than you bought it, you’ve created a capital gain—and, like other types of income, the IRS wants its share. (If you sell and lose money on the asset, that’s considered a capital loss and has a different set of tax consequences—another discussion.)
From the IRS’s standpoint, it’s an add-on to income and must be reported as such. Strictly speaking, the IRS considers any gain on any asset fair game. The gain is calculated by subtracting the adjusted basis in the asset from the amount you realized on the sale, according to the IRS. That, of course, includes boats, cars, and stocks, as well as the profit you might make from selling concert or sports tickets or those retro name-brand sneakers.
In terms of taxes, plenty, according to the IRS. Long-term gains—those held for longer than a year—are taxed at lower rates than ordinary income rates. Short-term tax gains are taxed at the same rate as your ordinary income, so there’s no tax benefit tied to them.
If you buy and sell an asset during a one-year period and make a profit, that’s considered ordinary income and booked as a short-term gain. (There are some exceptions, such as gifts and inheritances.) For 2018 until at least 2025, if you record a short-term profit and add it to your ordinary income, the ordinary tax rates range from 10% to 37%. The maximum tax, if it included the 3.8% Net Investment Income Tax (NIIT) applied to individuals, estates, and trusts that have income above the statutory thresholds, would be 40.8% on short-term gains.
Hold on to that asset for longer than a year before you sell it, and it falls into the long-term gains column. (Certain capital gains tied to partnership interests held in connection with the performance of investment services now require a three-year holding period to be called a long-term gain. Again, that’s another discussion.)
No, the capital gains rates are still at zero, 15%, and 20% for long-term held assets, but the income thresholds have changed. This also holds true for qualified dividends. As a result, long-term capital gains taxes do not exceed 23.8%, including the 3.8% NIIT.
The profit/loss for certain derivatives—futures, options on futures, and broad-based index options, such as SPX—is split into two capital gains buckets. For tax purposes, 60% is considered long-term capital gains and 40% short-term capital gains, regardless of how long you held the position.
Read more on special taxation rules.
The tax rate is zero if income thresholds fall below:
Moving up a tier, the 15% tax rate kicks in for income thresholds that are below:
Any income level that is higher than the 15% threshold is taxed at a 20% rate. (This breakdown of rates does not include the 3.8% NIIT.)
For now, the tax basics on long-term gains are mostly still intact, with the difference being income levels. Long-term gains, from a federal point of view, are less onerous than short-term gains, but may vary from state to state. Any questions? Contact a professional tax accountant.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.