Updated: January 27, 2022
If you have sold stocks, bonds, or property this year and made a profit, it is important to determine how much you owe in taxes. Determining capital gains is not an easy task because the Internal Revenue Code (IRC) has over 900 pages of regulations that govern everything from the tax rates to what qualifies as a capital gain. In this blog post, we will help make things easier by walking through step-by-step instructions for calculating your capital gains taxes.
1) What is a Capital Gain
A capital gain is a difference between the sale price of an asset and the purchase price of that asset. It is important to note that there are different types of capital gains taxes, with some being taxed at different rates than others. For example, long-term capital gains are taxed at a lower rate than short-term capital gains.
2) Long-term Vs. Short term capital gains
There are two different types of capital gains, long-term and short-term. Long-term capital gains refer to the total amount earned from an asset held for more than one year before it was sold or exchanged. Short-term capital gain refers to the total amount earned from an asset that has been owned less than a year before it was sold or exchanged.
In the United States, capital gains are taxed at different rates depending on whether they are short-term or long-term and if the taxpayer has an individual income of less than $37,950 (single) and $75,900 (married filing jointly). For taxpayers with a lower tax bracket, their long-term capital gains are taxed at 0% or 15%.
If a taxpayer earns more than $37,950 (single) and $75,900 (married filing jointly), then the tax rate for long-term capital gains is 20%, but if they have qualified dividends of less than that amount, then their taxes will be reduced to 18.80%.
3) Calculating Capital Gains Taxes
To calculate your capital gains taxes, you will need to determine what tax bracket you fall under and determine how much of your income consists of long-term versus short-term gains. You will then need to find out your adjusted gross income (AGI) and finally use a tax calculator to figure out how much you owe in taxes.
Step-by-step instructions for calculating your capital gains taxes:
Find out what tax bracket you fall under. Find the long-term gain which is found on line 11 of Form 8949, and write it down (in this case, $500).
To calculate how much income falls into each category, subtract the total amount from line 11 from the total on line 12 and then divide it by two. In this case, $500 – ($500 +$0) = $250 in long-term capital gains, meaning that 75% of your income is considered as long-term capital gains.
Find out your adjusted gross income (AGI). Your AGI can be found online 37 of Form 8949. In this case, it is $250
Finally, use a tax calculator to figure out how much you owe in taxes. You can find the tax amount for long-term capital gains on this calculator. So if your AGI was $250 and 75% of your income falls into the category, then you would owe $187.50 for your long-term capital gains taxes.
In this blog post, we walked through the steps to calculate your capital gains taxes. We first discussed what a capital gain is and different capital gains, long-term vs. short-term. Next, we talked about how tax brackets vary depending on whether or not you have qualified dividends and earn more than $37,950 (single) and $75,900 (married filing jointly). Finally, we walked through the steps to figure out your capital gains taxes using a tax calculator.