Have you ever wondered what happens to your investment profits? Profits you make from selling most assets are known as capital gains, and they are taxed at different rates depending on how long you have held the asset. This blog will help you better understand the rules and how to calculate capital gains tax rate for 2022 and 2023.

What is the capital gains tax?

A capital gains tax is a tax that investors pay on the profit from the sale of an asset. How the capital gain is taxed depends on filing status, taxable income, and how long the asset was owned. This type of tax applies to capital assets, which can include investments such as stocks, bonds, cryptocurrency, real estate, cars, boats and other tangible items. 

How does the capital gains tax rate work?

When stock shares or other taxable investments are sold, the capital gains are referred to as being “realized.” The capital gains tax rate does not apply to unsold investments or “unrealized capital gains.” For example, stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.

The time between the purchase of the asset and its sale, also called the holding period, will determine how the profit is classified for tax purposes. Profits made on assets held for a year or less before sale are considered short-term capital gains, while profits made on assets held for longer than a year are long-term capital gains.

What is the capital gains tax rate for 2023?

The current long-term capital gains tax rates for the 2022 and 2023 tax years are 0%, 15%, or 20% of the profit, depending on the income of the filer. The income brackets are adjusted annually.

Most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. That provides a financial incentive to hold investments for at least a year, after which the tax on the profit will be lower.

You can use this tool to estimate your after-tax investment gains: 2022 Capital Gains Calculator.

To recap, the capital gains tax rate ranges from 0% to 20% for long-term gains and 10% to 37% for short-term gains. Capital gains taxes only apply after you sell an investment or asset, and those assets held for more than a year are considered long-term.

Experts in Capital Gains Tax at Your Assistance

If you’re wondering about the tax rates for an investment or piece of property, DaMore Law can help. Our team of experts are prepared to answer your questions and guide you through the process. Visit our website for more information on all the ways DaMore Law can assist you.