Understanding Capital Gains Tax: Everything You Need to Know in 2024

Understanding Capital Gains Tax

Capital gains tax is one of the most important concepts to understand when investing or buying and selling assets. Being an old pro at this, capital gains taxes remain a huge determinant of how much profit you take home after selling an asset. We will break down what capital gains tax is, the difference between short-term and long-term capital gains tax, the capital gains tax rate in 2024, and whether unrealized capital gains tax applies to you. We’ll also help you understand how to manage your capital gains tax liability and ensure you’re staying compliant.

What is Capital Gains Tax?

Capital Gains Tax Definition
Capital gains tax is the part you will pay for the profit made from the sale of a capital asset, be it real estate, stocks, bonds, or other forms of investment. It just so happens to be the government‘s portion of your profit realized from an asset sold for more than its buying price. The amount of tax payable depends on the number of years that you held the asset and your total income.
For instance, let’s say you bought some stock for $5,000 and sold it for $8,000. Then your capital gain would be $3,000. That profit falls under the capital gains taxes, but the rate depends on whether it‘s a short-term or long-term capital gain.

Short-Term vs. Long-Term Capital Gains Tax

What is Short-Term Capital Gains Taxes?

Earnings from assets you have owned for one year or less are considered short-term capital gains. These are taxed at your ordinary income tax rate, meaning a taxation rate that might be anywhere from 10% to 37% of your total taxable income.

Why Higher Rate for Short-Term Gains?

This is because a short-term capital gain is considered more speculatively invested than a long-term holding, which often can be considered part of a strategy to encourage savings and investment for retirement or growth over time. Thus, if you sold an asset within a year since you bought it. Then you would pay at the same rate as income generally is taxed for regular income.

What is Long-term Capital Gains Tax?

Long-term capital gains relate to long-term capital appreciation realized from the sale of assets held for one year or more. They are taxed at a lower level than short-term capital gains. This is an incentive to invest for the long term. The tax rate of long-term capital gains varies according to your income, but for most people, it will fall in the range of 0%-20%.

As of 2024, this long-term capital gains tax rate will be taxed for:

0% for income falling in the 10% or 12% income tax brackets
15% for income within the 22% to 35% income tax brackets
20% for tax on the 37% tax bracket
In addition, the NIIT of 3.8% may also be levied upon capital gains for specific individuals whose income exceeds specific thresholds. Though it is typically subject to people of a higher income threshold.

How Much is Capital Gains Tax in 2024?

Capital Gains Tax Rate 2024
As mentioned above, the Capital Gains Taxes in 2024 depend on how long you held the asset and your income level. To give a clear perspective, here are the estimated capital gains tax rates for 2024 by your filing status and income:

Long-Term Capital Gains Tax Rates 2024:

0 percent: For people whose taxable incomes are up to $44,625 or married filing jointly with an income of up to $89,250.
15%: Taxable income is within the range of a single and married filing jointly of $44,626-$492,300 and $89,251-$553,850
20%: When taxable income is more than $492,300 for single and greater than $553,850 for married filing jointly

Short-Term Capital Gains Tax Rate (2024):

As a short-term capital gain, the rate would work as ordinary income since it is going to apply the same tax on income, which ranges from 10% to 37% based on the taxable income of a respective individual.

Example:
If you have $50,000 in taxable income in the year 2024 your Long-term capital gains tax rate may be 15%.
What a short-term capital gains and how do they differ from long-term capital gains?
If you sell stock within one year of purchasing the stock and realize a profit of $10,000. Then that $10,000 is a short-term capital gain, and you’ll pay ordinary income tax on this.

Unrealized Capital Gains Tax: All You Need to Know

What are Unrealized Capital Gains?

Unrealized capital gains are increases in value yet to be sold. For instance, if you bought 100 shares of a company at $20 per share and the market value has increased to $30 per share, then your unrealized capital gain is $1,000 (100 shares x $10 increase in value).

Are Unrealized Capital Gains Taxed?

In other words, no. Only if you sell the asset and capture the profit will you pay taxes on unrealized capital gains. In other words, if you kept holding onto the asset and its value went up, you would owe nothing in taxes until you sold it. Once you sell it, however, this unrealized gain then becomes a realized gain, subject to capital gains tax short-term or long-term, depending on how long you had it.
Note that discussions of unrealized capital gains taxes are. From time to time, part of policy debates, but the U.S. tax system has not taxed unrealized gains to date. To date, this remains a proposal alone and does not apply.

How Do You Avoid or Minimize Capital Gains Tax

You will not be able to completely escape from capital gains tax which can be paid. However, you can take actions to minimize your bill:
1. Hold Assets Longer-Long Term Benefits
Holding investments for more than a year will save you the simplest way to save on taxes by taking advantage of lower long-term Capital Gains Taxes rates.
2. Utilize Tax-Favored Accounts
Use tax-deferred accounts, such as a 401(k) or IRA, to delay the payment of taxes until retirement, when presumably you will be in a lower tax bracket. A Roth IRA lets you pay no taxes on qualified distributions, including capital gains, when taken in retirement.
3. Use Losses to Offset Gains (Tax-Loss Harvesting).
If you have reaped profits from selling investments that have done well, you can use those losses by selling off other investments that have done poorly. That’s called a tax-loss harvesting strategy to reduce your overall taxable gains.
4. Give to Charity
Donate appreciated assets to charity. You get to exclude capital gains on the profit and might also be able to take a charitable deduction.

Conclusion: Understanding Capital Gains Tax for 2024

Irrespective of the type of investment – stock, real estate, or any other form of investment – one is bound to face capital gains tax. Understanding short-term and long-term capital gains differences, the rate of capital gains tax in 2024. How to handle unrealized capital gains will get you ready for all the necessary planning for your investments.

Syed Professional Services consults

Their clients on the tax, capital gains tax being included. We advise those wishing to minimize their taxes on Capital Gains Taxes about their investments.

Do you have questions about capital gains tax, or perhaps something else for which you’d like personalized tax advice? Contact Syed Professional Services today and let‘s help you optimize your tax strategy for 2024 and beyond.