The Tax Cut and Jobs Act (TCJA) left capital gains taxes relatively untouched. For most investors, this is good news. Long-term capital gains tax rates remain at 0 percent, 15 percent, and 20 percent, with the percentage based on the taxpayer’s aggregate capital gains for the year. Short-term capital gains range from 10 percent to 37 percent. In either case, the tax bite remains low for most investors, providing continued incentive to invest idle funds.
Properly claiming capital gains is an important consideration, as an investment guru, Sean Seshadri tells his students. After all, a nasty tax penalty could easily take your effective tax rate into the stratosphere, making you wish you had left your cash in a plain, boring bank account. The simplicity of filing taxes under the TCJA should make properly claiming capital gains relatively easy for people who file their returns. Here is what you need to know:
Determine your capital gains (or losses)
As explained by Investopedia, the first step is to determine your cost basis for each position. The cost basis is what you paid for the investment. For example, if you purchased ten shares of XYZ stock for $50, your cost basis is $500, provided you were able to acquire the stock without fees. If you had to pay brokerage commissions, be sure to add that to your cost basis.
Next, determine the selling price. If you sold your ten shares of XYZ stock for $75, you have a selling price of $750, minus any brokerage commissions. In this example, your capital gain is the sales price ($750) minus the cost basis ($500) for a total capital gain of $250. If you paid a $5 commission to both buy and sell the stock, your cost basis would increase by $5, and your sales price would be reduced by $5, leaving you with a gain of $240.
If you bought ten shares of XYZ stock at $75 and sold it at $50, you would subtract $750 from $500, leaving you with $-250. If you paid $10 in commissions, your loss is $-260.
Add up the total capital gains (or losses)
Each investment you sold during the year must be tabulated as a separate transaction. Next, determine which transactions are short-term capital gains and which are long-term capital gains. Investments held for less than a year are considered short term.
Because short-term capital gains are taxed as ordinary income, the effective tax rate will usually be higher, though that depends on your tax situation. To determine your capital gains for each, take all the total gains and losses for that tax category and add them up. For example, if you sold three stocks as long-term capital gains with totals of $1,000, $1,500, and $-750, you would add $1,000, $1,500, and $-750, for a total capital gain of $1,750. If you had any sales that qualify for short-term capital gains treatment, you would follow the same procedure.
Determine your tax rate
As explained by Marketwatch, long-term capital gains have been simplified by the TCJA. The tax rate no longer relates to ordinary income taxes. Now, you pay 0 percent, 15 percent, or 20 percent, depending on your filing status and amount of capital gains. For example, single taxpayers enjoy the following rates:
- $0 to $38,600: 0 percent tax
- $38,601 to $425,801: 15 percent tax
- $425,801 and over: 20 percent tax
Any short-term capital gains are added to ordinary income and paid at your regular income-tax rate.
Determine if you must pay the NIIT
The Net Investment Income Tax (NIIT) took effect in 2013. It requires taxpayers with adjusted gross incomes of over $200,000 for single filers and $250,000 for joint filers to pay an additional 3.8 percent on all capital gains taxes.
The low long-term capital gains taxes continue to benefit investors. With the tax filing simplified under the TCJA, most taxpayers will find it easy to calculate their capital gains liability. For most, a few calculations using the numbers on their brokerage account statements will wrap up their taxes and get any refunds on the way. For ideas on how to generate above-average capital gains, visit the Sean Seshadri investment blog.
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