Capital Gains

Capital gains are the profits you get when you sell an asset. Assets can be stocks, mutual funds, ETFs, etc. They can be subject to either short-term (less than a year) or long-term tax rates (longer than a year). When you sell an asset for a higher price than its original value, the profit you make on that sale is called a capital gain. 

• Long-term tax rates apply when you owned the asset longer than a year

• Short-term tax rates apply when you owned the asset less than a year

Capital gains are subject to taxes at a rate that depends on adjusted gross income (AGI)*.  The tax rate is currently set at 0%, 15% or 20%.

Sample case:  A person who files their taxes as an individual (single) sold a stock which they owned for longer than a year. They purchased 50 shares of a stock for a price of $5,000. They sold the 50 stock shares four years later for $9,000, a profit (capital gains) of $4,000.  The person's income was $43,000. Adding the gain from the sale of stock the total adjusted income (AGI) became $47,000.  Will this person have to pay any tax on their capital gains?

NO. Since this person's AGI is below $48,350, they qualified for 0% capital gains tax rate on the stock's gains. 

However, if they owned the stock for less than a year, they would pay a capital gains tax on the $4,000 at their ordinary tax rate.

*Adjusted Gross Income (AGI), is a tax term used by the IRS to determine your taxable income. It represents your total gross income (wages, interest, dividends, capital gains, business income, etc.) minus certain adjustments (such as student loan interest, retirement contributions, IRA contributions, etc.). Gross income and adjusted gross income