How do you calculate Capital Gains taxes?

Taxes. Just the word alone is enough to strike fear into the heart of any citizen. However, taxes actually aren’t that complicated, even on your investment profits (referred to as Capital Gains). Although there are many strategies you can use to reduce your tax obligations, basic capital gains taxes are actually quite simple to calculate.  

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Capital Gains are your profits

The term “capital gains” simply refers to the money you earned on your investment – the profits. Since the majority of investors own stock equities in some way, we’ll use profits from a stock sale as our example throughout this article. When you sell a stock, you are only taxed on the profits – the amount you made – not the total amount of the transaction. Example: You bought 1 share of company XYZ at $10 and sold the share when the price hit $100. Your capital gains (profits) are $90.00 – the final price of the share ($100) minus what you paid to buy it ($10).  

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Short-Term Gains versus Long-Term Gains

How much of the $90 you owe in capital gains tax is determined by how long you owned the stock: Short-Term Rate (i.e. less than one year): If the time between the date you bought the stock and the date you sold the stock is less than one year, you pay your Federal Income Tax rate (the same percentage you pay on your wages or salary). See below for 2018’s tax rates. Long-Term Rate (i.e. one year or longer): If the time between the date you bought the stock and the date you sold the stock is more than one year, you pay your Capital Gains Tax Rate (also dependent on your total income). For 2018, the Capital Gains Tax Rates are:

• $51,700 or less: 0% (you pocket the entire $90)
• $51,701-$452,400: 15% (you owe $13.50 of the $90 profit)
• $452,401 or more: 20% (you owe $18.00 of the $90 profit)

Your financial adviser or tax accountant may be able to provide strategies to reduce your tax obligations as well as taking full advantage of capital losses and other situations which may apply to you. However, at the most basic level, you can estimate your own tax obligations by using the figures and examples we covered above. It really is that easy.  

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What are the Federal Income Tax Brackets for 2018?

Here are 2018’s Federal Income Tax Brackets:

• For Individuals:
  • • 10% up to $9,526
    • 12% on $9,526 to $38,700
    • 22% on 38,701 to $82,500
    • 24% on $82,501 to $157,000
    • 32% on $157,501 to $200,000
    • 35% on $200,001 to $500,000
    • 37% on any amount over $500,000
   
• For those Married Filing Jointly:
  • 10% up to $19,050
  • 12% on $19,051 to $77,400
  • 22% on $77,401 to $165,000
  • 24% on $165,001 to $315,000
  • 32% on $315,001 to $400,000
  • 35% on $400,001 to $600,000
  • 37% on any amount over $600,00

Source: IRS Publication 505