In the United States, long-term capital gains are taxed at a lower rate than ordinary income. The tax rate for long-term capital gains depends on the individual’s income and tax filing status. The calculation of long-term capital gains and ordinary income for tax purposes involves several steps:
- Determine the cost basis of the asset: The cost basis is the original purchase price of the asset, plus any associated costs such as commissions or fees.
- Calculate the gain or loss: Subtract the cost basis from the sale price of the asset. If the result is positive, it is a gain; if it is negative, it is a loss.
- Determine if the gain is long-term or short-term: A gain is considered long-term if the asset was held for more than one year before it was sold. A gain is considered short-term if the asset was held for one year or less.
- Report the gain or loss on your tax return: For long-term capital gains, report the gain or loss on Form 1040 Schedule D. For short-term capital gains, report the gain or loss on Form 1040 as part of your ordinary income.
- Calculate the tax on the long-term capital gains: The tax rate for long-term capital gains depends on the individual’s income and tax filing status. For tax year 2021, for example, individuals with income below $40,400 (single) and $80,800 (married filing jointly) are taxed at 0% on their long-term capital gains, while individuals with income above $441,450 (single) and $496,600 (married filing jointly) are taxed at 20% on their long-term capital gains.
- Add the long-term capital gains tax with the ordinary income tax to calculate the total tax liability.
It’s important to note that tax laws can change, and it’s best to consult a tax professional or check the IRS website for the most current information.