Long-term capital gains tax (2024)

Is that Beanie Baby that you bought 20 years ago for $7 a dusty windfall? If you somehow sell it for $1,000, the taxman will douse your joy because, chances are, you’ll owe long-term capital gains tax on your $993 profit.

When you eventually sell assets that have accumulated value over the years, the IRS gets a cut. That’s the long-term capital gains tax. For most people, it might not bite often, but when it does, it bites deep.

What is long-term capital gains tax?

“Most people think that only the rich are going to incur this tax, but capital assets exist everywhere,” says Jonathan McGuire, partner with CPA firm Aldrich Advisors. Income taxes are taxed as you earn the income. But capital gains taxes are taxed when you sell an asset, assuming that you sold the asset for more than you paid for it.

What’s the line between a long-term gain and a short-term gain?

One day. Selling an asset you’ve held for 365 or fewer days counts as a short-term gain (or loss). Selling an asset you’ve held for 366 days or more counts as a long-term gain (or loss).

“If you sell it for the exact same amount that you bought it, there’s no tax,” says McGuire. And if you sell the asset for less than you paid, your consolation prize is a tax loss, which actually is worth something: You can use it to cancel out some taxes on gains you’ve realized elsewhere in your portfolio.

But because most people don’t regularly buy, hold, then sell art, collectibles, precious metals, real estate and other assets like they might with stocks or other traditional investments, they might be ambushed by the long-term capital gains tax.

“It catches people by surprise, if they’re usually in a lower income tax bracket and they sell something for a large gain. That’s where it can cause some heartache,” says McGuire.

Calculating your long-term capital gains

The fundamental arithmetic is not too onerous: Subtract the cost of acquiring the asset from the sale price. What you originally paid is the “basis.” The difference between what you paid and what you were paid is the amount on which you calculate taxes, for most things. (Real estate has its own long-term capital gains rules, which we cover below.)

For example, if you bought a museum-quality antique canoe for $500, owned it for at least 366 days, and then sold it to another collector for $1,000, you would owe long-term capital gains taxes on the capital gain of $500.

Tax strategies to minimize long-term capital gains

“The general rule is loss harvesting,” says Edward Renn, a partner with the tax team of law firm Withers. That’s the strategy of offsetting a gain with a loss.

“If you bought two stocks two years ago, and one doubled in value and one halved in value, sell the one that halved so you can offset the one that doubled,” explains Renn.

The idea is simple, but it requires precise recordkeeping to ensure that you have the documentation to prove your basis — i.e., what you paid for the asset to begin with — so you can calculate your gain or loss.

And, recommends Renn, the general approach for making the most of tax losses is to match short-term capital losses with short-term capital gains, and to match long-term capital losses with long-term capital gains.

Capital gains versus earned income tax rates

The money you earn is taxed differently from the money you get from selling a long-held asset that increased in value.

Earned income is taxed according to income tax brackets.

Short-term capital gains are taxed as ordinary income, according to earned income tax brackets.

But long-term capital gains generally have tax rates that are lower than earned income, topping out at 20% in most circ*mstances, advisors say.

Considerations for real estate capital gains tax

A house is often the largest single asset held by an American family. Capital gains taxes apply when you sell your primary residence, even if you are immediately rolling over the appreciated equity into a new house, says Mark Eid, a managing director of Acts Financial Advisors. If you’ve owned and lived in the house for any two of the five years immediately preceding the sale of the house, you can claim an exclusion of $250,000, if you are single, or $500,000 for married couples.

But, warns Eid, the recent rapid run-up in home values could spring a capital gains surprise for older homeowners who have owned and lived in their houses for decades. If the amount of value that the property has gained since you bought it exceeds the exclusion, you will owe a capital gains tax.

So, a married couple that bought a house in 1990 for $100,000 and now sells it for $650,000, for instance, would have to pay capital gains tax on the amount over the basis of $100,000 plus the exclusion of $500,000, which comes to a taxable gain of $50,000.