Capital Gains Taxes Explained

It has been a long time since I’ve written a nerdy post. So, I needed to exercise that need.

Capital Gains taxes aren’t a sexy topic by any means; however, understanding a little about capital gains taxes will help you understand how rigged the system is in favor of wealthy. It’s things, like capitals gains taxes, that have caused me to be as progressive as I have become.

For the purposes of this post, we are talking about long-term capital gains. Let’s break the definition down into parts. To keep it simple, we will go in this order: capital; gain; and long-term.

A capital transaction almost always involves the sale of stocks or real estate. Other things can be capital assets, but we are keeping this simple.

A capital gain is the increase between what you paid for the investment and what you got for selling it. If you lost money on the sale, it’s a capital loss.

In order for a capital asset to qualify for the special tax treatment afforded long-term capital assets, you must have held it for at least 366 days.

Under current tax law, people in the 10% and 12% tax brackets don’t pay the capital gains tax. Since the 12% bracket ends at $39,475.00 of taxable income, in order to pay no capital gains tax your taxable income must be below $39,475.00. Since you have had to hold the capital asset for more than a year, very few people in the 10% and 12% brackets are able to take advantage of the zero capital gains rate.

Here’s where things really start getting unfair. The 15% capital gains tax rate begins at the $39,475.00 limit and extends through the 35% tax bracket. The 37% tax bracket begins at $510,300.00. This means that everyone with a taxable income between $39,475.00 and $510,310.00 pays the same 15% capital gains tax.

The top capital gains tax rate is 23.8% and begins at the top income tax bracket of 37%. As cover above, the 37% tax bracket begins at a taxable income of $510,310.00. If your taxable income is at least $510,310.00 your capital gains tax rate is 13.2% lower than is your income tax rate. So, wealthy people, who are most likely to own stocks, get a huge break by having their stock income taxed as capital gains instead of income.

Note, the tax brackets discussed in this post are associated with taxpayers filing a single tax return on income earned in 2019.

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