Question 1

What is the difference between short-term and long-term capital gains?

Accepted Answer

Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income tax rate (10%-37%). Long-term capital gains apply to assets held for more than one year and benefit from preferential tax rates of 0%, 15%, or 20%. Holding an investment for just one day longer than a year can save you a significant amount in taxes.

Question 2

What is the long-term capital gains tax rate for 2024?

Accepted Answer

For 2024, the long-term capital gains rates are: 0% for taxable income up to $47,025 (single) or $94,050 (married filing jointly), 15% up to $518,900 (single) or $583,750 (MFJ), and 20% above those thresholds. High earners may also owe an additional 3.8% Net Investment Income Tax (NIIT) if their modified adjusted gross income exceeds $200,000 (single) or $250,000 (MFJ).

Question 3

Can capital losses offset gains?

Accepted Answer

Yes, capital losses can offset capital gains dollar for dollar. Short-term losses first offset short-term gains, and long-term losses first offset long-term gains, with any remaining losses crossing over. If total losses exceed total gains, you can deduct up to $3,000 of net capital losses against ordinary income per year, carrying forward unused losses indefinitely.

Question 4

How is capital gains tax calculated?

Accepted Answer

The formula is straightforward: Capital Gain = Sale Price - Purchase Price - Transaction Costs (commissions, fees). The tax owed is then Capital Gain x applicable tax rate. For inherited assets, the cost basis is typically the fair market value on the date of death (stepped-up basis), which can significantly reduce or eliminate the taxable gain.

Question 5

What is the Net Investment Income Tax (NIIT)?

Accepted Answer

The NIIT is an additional 3.8% tax on investment income (including capital gains, dividends, interest, and rental income) for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). This effectively creates a top long-term capital gains rate of 23.8% for high earners. The NIIT thresholds are not indexed for inflation.

Question 6

Are there exemptions for home sales?

Accepted Answer

Yes, the Section 121 exclusion allows you to exclude up to $250,000 in capital gains ($500,000 for married filing jointly) from the sale of your primary residence. To qualify, you must have owned and lived in the home for at least 2 of the last 5 years before the sale. This exclusion can be used repeatedly, but generally no more than once every 2 years.

Question 7

What is tax-loss harvesting?

Accepted Answer

Tax-loss harvesting is a strategy where you sell investments at a loss to offset capital gains from other investments, reducing your overall tax bill. Be aware of the wash-sale rule: if you buy a substantially identical security within 30 days before or after the sale, the IRS disallows the loss deduction. This strategy is most effective toward the end of the tax year.

Capital Gains Tax Calculator

Understanding Capital Gains Tax

Capital Gains Tax Formula

2024 Long-Term Capital Gains Rates

Short-Term vs. Long-Term: Example

Tax-Saving Strategies

Important Notes

FAQ

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