The appropriate year-end planning strategy for an individual's capital gains and losses will depend on a confluence of factors, including the amount of regular taxable income, the tax rate that applies to the individual's “adjusted net capital gain,” whether recognized capital gains are long- or short-term, and whether there are unrealized capital losses.
Capital gain and loss basics. An individual's “adjusted net capital gain” is taxed at rates of 0%, 15%, or 20%. “Adjusted net capital gain” is net capital gain plus qualified dividend income, minus specified types of long-term capital gain that are taxed at a maximum rate of 28% (gain on the sale of most collectibles and the unexcluded part of gain on small business stock) or 25% (“unrecaptured section 1250 gain”—i.e., gain attributable to real estate depreciation). “Net capital gain” is the excess of net long-term capital gains (from sales or exchanges of capital assets held for over one year) over net short-term capital losses for a tax year. Net short term capital gains (i.e., from the sales of capital assets held for one year or less before being sold) are taxed as ordinary income.
Long-term capital losses are used to offset long-term capital gains before they are used to offset short-term capital gains. Similarly, short-term capital losses must be used to offset short-term capital gains before they are used to offset long-term capital gains. Non-corporate taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income (AGI).
Capital gain tax rates. For 2018:
- . . . the 0% tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is not more than the maximum zero rate amount ($77,200 for joint filers and surviving spouses, $51,700 for heads of household, $38,600 for single filers, $38,600 for married taxpayers filing separately, and $2,600 for estates and trusts);
- . . . the 15% tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is over the amount subject to the 0% rate, but is not more than the maximum 15% rate amount ($479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married taxpayers filing separately, and $12,700 for estates and trusts); and
- . . . the 20% tax rate applies to adjusted net capital gain to the extent that it, when added to regular taxable income, is over $479,000 for joint filers and surviving spouses, $452,400 for heads of household, $425,800 for single filers, $239,500 for married taxpayers filing separately, and $12,700 for estates and trusts.
