702 / How is an individual taxed on capital gains and losses?
For tax years beginning in 2018 and before 2026, the long-term capital gain brackets no longer neatly align with the ordinary income tax brackets.
In 2025, the 0 percent capital gains rate will apply to joint filers who earn less than $96,700, married taxpayers filing separately who earn less than $48,350, heads of households who earn less than $64,750, single filers who earn less than $48,350, and trust and estates with less than $3,250 in income.
The 15 percent capital gains rate will apply to joint filers who earn more than $96,700 but less than $600,050, married taxpayers filing separately who earn more than $48,350 but less than $300,000, heads of households who earn more than $64,750 but less than $566,700, single filers who earn more than $48,350, but less than $533,400 and trust and estates with more than $3,250 but less than $15,900 in income.
The 20 percent capital gains rate will apply to joint filers who earn more than $600,050 married taxpayers filing separately who earned more than $300,000, heads of households who earn more than $566,700, single filers who earn more than $533,400, and trusts and estates with more than $15,900 in income.1
In 2026, the 0 percent capital gains rate will apply to joint filers who earn less than $98,900, married taxpayers filing separately who earn less than $49,450, heads of households who earn less than $66,200, single filers who earn less than $49,450, and trust and estates with less than $3,300 in income.
The 15 percent capital gains rate will apply to joint filers who earn more than $98,900 but less than $613,700, married taxpayers filing separately who earn more than $49,450 but less than $306,850, heads of households who earn more than $66,200 but less than $579,600, single filers who earn more than $49,450, but less than $545,500 and trust and estates with more than $3,300 but less than $16,250 in income.
The 20 percent capital gains rate will apply to joint filers who earn more than $613,700 married taxpayers filing separately who earned more than $306,850, heads of households who earn more than $579,600, single filers who earn more than $545,500, and trusts and estates with more than $16,250 in income.
Aside from the changes in the income thresholds that determine the applicable rate, tax reform did not change the tax treatment of capital gains and losses and qualified dividend income.2
For tax years beginning in 2013 and before 2018, adjusted net capital gain was generally subject to a maximum rate of 0 percent for taxpayers in the 10 and 15 percent tax brackets, a maximum rate of 15 percent for taxpayers in the 25 percent, 28 percent, 33 percent, and 35 percent tax brackets (see "Reduction in Capital Gain Rates," Q 704), and a maximum rate of 20 percent for taxpayers in the 39.6 percent tax bracket.
Despite these general brackets, detailed rules as to the exact calculation of the capital gains tax result in some exceptions.3
"Adjusted net capital gain" is net capital gain reduced (but not below zero) by the sum of: (1) unrecaptured IRC Section 1250 gain; and (2) 28 percent rate gain (both defined below); plus (3) "qualified dividend income" (as defined in IRC Section 1(h)(11)(B)).4
Gain is determined by subtracting the adjusted basis of the asset sold or exchanged from the amount realized. Loss is determined by subtracting the amount realized from the adjusted basis of the asset sold or exchanged. See Q 692.The amount realized includes both money and the fair market value of any property received.5 Gains and losses from the sale or exchange of capital assets are either short-term or long-term. Generally, in order for gain or loss to be long-term, the asset must have been held for more than one year. See Q 699.
Generally, taxpayers may elect to treat a portion of net capital gain as investment income.6 If the election is made, any net capital gain included in investment income will be subject to the taxpayer's marginal income tax rate. The election must be made on or before the due date (including extensions) of the income tax return for the taxable year in which the net capital gain is recognized. The election is to be made on Form 4952, "Investment Interest Expense Deduction."7 See Q 8039.
Net capital gain is the excess of net long-term capital gain for the taxable year over net short term capital loss for such year.8 However, net capital gain for any taxable year is reduced (but not below zero) by any amount the taxpayer takes into account under the investment income exception to the investment interest deduction.9 See Q 8039.
The Code provides that for a taxpayer with a net capital gain for any taxable year, the tax will not exceed the sum of the following six items:
(A) the tax computed at regular rates (without regard to the rules for capital gain) on the greater of (i) taxable income reduced by the net capital gain, or (ii) the lesser of (I) the amount of taxable income taxed at a rate below the income tax rate that applies based on the taxpayer's income with respect to the income thresholds described above, or (II) taxable income reduced by the adjusted net capital gain;
(B) 0 percent of so much of the taxpayer's adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of (i) the amount of taxable income that would (without regard to this paragraph) be taxed at the income tax rate that applies based on the taxpayer's income with respect to the income thresholds described above over (ii) the taxable income reduced by the adjusted net capital gain;
(C) 15 percent of the lesser of (i) so much of the taxpayer's adjusted net capital gain (or, if less, taxable income) as exceeds the amount on which a tax is determined under (B), above, or (ii) the excess of (I) the amount of taxable income which would be taxed at below the income tax rate that applies based on the taxpayer's income with respect to the income thresholds described above over (II) the sum of the amounts on which a tax is determined under (A) and (B), above;
(D) 20 percent of the taxpayer's adjusted net capital gain (or, if less, taxable income) in excess of the sum of the amounts on which tax is determined under (B) and (C), above;
(E)25 percent of the excess (if any) of (i) the unrecaptured IRC Section 1250 gain (or, if less, the net capital gain (determined without regard to qualified dividend income)), over (ii) the excess (if any) of (I) the sum of the amount on which tax is determined under (A) above, plus the net capital gain, over (II) taxable income; and
(F)28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under (A) through (E) above.10
It is important to note that as a result of this complex formula, generally, the maximum capital gains rate on adjusted net capital gain for 2013-2017 was 20 percent to the extent an individual is taxed at the 39.6 percent income tax rate, 15 percent to the extent an individual is taxed at the 25, 28, 33 or 35 percent income tax rates (see Q 753), and 0 percent to the extent the individual is taxed at the 15 percent or 10 percent income tax rates.11 For 2018-2025, the maximum capital gains rate will be determined based on the income thresholds discussed above, which do not neatly align with the individual income tax brackets that will apply beginning in 2018 (however, the 0, 15, and 20 percent capital gains rates continue to apply).
IRC Section 1250 provides for the recapture of gain on certain property on which accelerated depreciation has been used. "Unrecaptured IRC Section 1250 gain" means the excess, if any, of: (i) that amount of long-term capital gain (not otherwise treated as ordinary income) that would be treated as ordinary income if IRC Section 1250(b)(1) included all depreciation and the applicable percentage under IRC Section 1250(a) were 100 percent; over (ii) the excess, if any of (a) the sum of collectibles loss, net short-term capital loss and long-term capital loss carryovers, over (b) the sum of collectibles gain and IRC Section 1202 gain. However, at no time may the amount of unrecaptured IRC Section 1250 gain that is attributable to sales, exchanges and conversions described in IRC Section 1231(a)(3)(A) for any taxable year exceed the net IRC Section 1231 gain, as defined in IRC Section 1231(c)(3) for such year.12
"28 percent rate gain" means the excess, if any, of (A) the sum of collectibles gain and IRC Section 1202 gain (i.e., gain on certain small businesses), over (B) the sum of (i) collectibles loss, (ii) net short-term capital loss, and (iii) long-term capital loss carried over under IRC Section 1212(b)(1)(B) (i.e., the excess of net long-term capital loss over net short-term capital gain, carried over to the succeeding taxable year).13
"Collectibles gain or loss" is gain or loss on the sale or exchange of a collectible that is a capital asset held for more than one year, but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.14 Examples of collectibles include artwork, gems and coins.15 For additional details, see Q 7713 and Q 7714.
"IRC Section 1202 gain" means the excess of (A) the gain that would be excluded from gross income under IRC Section 1202 but for the percentage limitation in IRC Section 1202(a) over (B) the gain excluded from gross income under IRC Section 1202 (i.e., 50 percent exclusion for certain qualified small business stock).16 See Q 7521 and Q 7522 for details. (JGTRRA 2003 provides that for alternative minimum tax purposes, an amount equal to 7 percent of the amount excluded from gross income for the taxable year under IRC Section 1202 will be treated as a preference item.17 See Q 7522.)
Collectibles gain and IRC Section 1250 gains under IRC Section 1(h) are subject to special rules when an interest in a pass-through entity (i.e., partnership, S corporation, or trust) is sold or exchanged. Regulations finalized in 2000 provide rules for dividing the holding period of an interest in a partnership.18
Special rules apply in the case of wash sales (see Q 7537), short sales (see Q 7525), and IRC Section 1256 contracts (see Q 7592).
NOTE: Beginning in 2013, taxpayers may also have to account for the 3.8 percent tax on investment-type income and gains under IRC Section 1411. This tax was not impacted by tax reform.
1. IRC § 1(j)(5).
2. IRC § 1(h), as amended by ATRA.
3. IRC § 1(h), as amended by ATRA.
4. IRC § 1(h)(3).
5. IRC § 1001.
6. IRC §§ 163(d)(4)(B), 1(h)(2).
7. Treas. Reg. § 1.163(d)-1.
8. IRC § 1222(11).
9. IRC §§ 163(d)(4)(B)(iii), 1(h)(2).
10. IRC §§ 1(h)(1)(D); 1(h)(1)(A), 1(h)(1)(B), IRC §§ 1(h)(1)(C), 1(h)(1)(E), as amended by ATRA 2012.
11. IRC § 1(h).
12. IRC § 1(h)(6).
13. IRC § 1(h)(4).
14. IRC § 1(h)(5).
15. IRC § 408(m)(2).
16. IRC § 1(h)(7).
17. IRC § 57(a)(7).
18. TD 8902, 2000-2 CB 323.