Capital Gains: How They Are Taxed and Managed

A capital gain is the profit when you sell an asset — shares, a fund, property, a business, a collectible, crypto — for more than your cost basis (what you paid plus certain costs). Unlike dividends or rent, it only arrives when you sell, so it is lumpy income rather than a steady one.

Short-term and long-term

Assets held one year or less produce short-term gains, taxed as ordinary income. Assets held more than a year produce long-term gains, taxed at 0%, 15% or 20% depending on taxable income, with a 3.8% net investment income tax for higher earners. Collectibles and some property have their own rates. The one-year line is often worth waiting for.

Losses

Losses offset gains. If losses exceed gains, up to $3,000 a year ($1,500 if married filing separately) can offset other income, and the rest carries forward to future years. Selling at a loss and buying the same or a substantially identical investment within 30 days before or after is a "wash sale", and the loss is disallowed for now.

Selling your home

If you owned and lived in your main home for at least two of the last five years, up to $250,000 of gain ($500,000 for most married couples filing jointly) can be excluded from tax.

What goes wrong

Selling a day before a gain would have turned long-term, losing track of cost basis (especially with reinvested dividends), concentrating in a single holding, and trading often enough that short-term rates and fees eat the gains. Brokerages report sales on Form 1099-B; you report them on Form 8949 and Schedule D.

• Portfolio income
• Compound interest calculator

See also: Cashback and Rewards.