Capital Gains: How to Determine Your Tax Rate

A simple-sounding question that, in the world of tax planning, is harder to answer. The simplest calculation is that, in 2021, single taxpayers will pay 0% capital gains taxes if their adjusted gross income is below $40,400, while joint taxpayers will pay 0% capital gain taxes below $80,800 of adjusted gross income. After that, the 15% rate kicks in up to $445,850 (single) or $501,600 (joint). Above those income thresholds, taxpayers would pay at a 20% rate.

But, of course, it is never that simple. You may also be subject to the net investment income tax, or NIIT, which adds 3.8% to the tax on your overall investment income — that is, the combination of all capital gains, plus interest, dividend, rental or royalty income. People are subject to this additional tax if their modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers) or, alternatively, their net investment income surpasses these thresholds.

While these details are complicated, they only apply to “traditional” investments, like stocks, bonds, mutual funds and ETFs. Long-term gains on depreciable real estate investments is set at a maximum federal rate of 25% (plus the NIIT if applicable).

Not surprisingly, it’s actually more complicated than that. Assume you sold a rental house for a $100,000 gain, after claiming $40,000 of depreciation deductions. The first $40,000 of the gain (the amount depreciated) would be taxed at a 25% capital gains rate, while the remaining $60,000 would be taxed at 20%. Add to that the NIIT if it applies.

There’s more. If you are selling collectibles like artwork, coins or stamp collections, bullion or precious metal ETFs, the maximum federal rate on long-term gains is 28%.

What about short-term capital gains? Those are taxed at the (generally) higher ordinary income tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% rates.

Trying to determine your capital gains tax rate could also be known as the full employment act for tax professionals.