In this article...

We will answer all these questions and more in this article, if any point you feel confused or overwhelmed, please reach out to our qualified capital gains tax attorneys to help you with this process:

  • What is a capital gains tax?
  • What is a capital asset?
  • Do you need to pay capital gains tax on cryptocurrency?
  • What is short term vs. long term for capital gains tax?
  • When should I realize capital gains?
  • Do I have to pay capital gains tax when I sell my home?
  • What is a net investment income tax?
  • What is the federal capital gains tax rate 2020, 2021?
  • What is the Illinois capital gains tax rate 2020, 2021?
  • What is the Iowa capital gains tax rate 2020, 2021?
  • What is the future of capital gains tax?
  • What is a capital gains tax?

You may be surprised to learn that even if you do not work on Wall Street, you will likely still need to pay capital gains tax at several points in your life.  Understanding what qualifies for capital gains tax, when to realize capital gains or capital losses, and what your capital gains tax rate will be is a good place to start.  Once you have this information, you can work out a capital gains tax calculator to give yourself a good idea of what your capital gains tax payment will look like.  Before we get into any of that however, we need to begin with a capital gains tax definition.  We will answer all these questions and more in this article, if any point you feel confused or overwhelmed, please reach out to our qualified capital gains tax attorneys to help you with this process:

  • What is a capital gains tax?
  • What is a capital asset?
  • Do you need to pay capital gains tax on cryptocurrency?
  • What is short term vs. long term for capital gains tax?
  • When should I realize capital gains?
  • Do I have to pay capital gains tax when I sell my home?
  • What is a net investment income tax?
  • What is the federal capital gains tax rate 2020, 2021?
  • What is the Illinois capital gains tax rate 2020, 2021?
  • What is the Iowa capital gains tax rate 2020, 2021?
  • What is the future of capital gains tax?
  • What is a capital gains tax?

You can think of a capital gains tax as a specific tax on the net profit made upon sale of a capital asset.  A simple example; you bought a stock in Joe Plumbing Inc. for $5, that stock then went to $10, at which point you decide to sell.  You have made a capital gain of $5, and thus you will need to pay a capital gains tax on that $5 profit.  Note that unlike income tax, there is no set interval at which time you pay capital gains tax.  Capital gains tax are instead paid at the point of “realization,” that is to say when you make a sale and obtain the profit.  So called unrealized gains, for example the appreciation in a house’s value or a stock’s increase in trading price, are untaxed until you have sold.  This has big implications for when to liquidate your capital assets which we discuss further on, but the next question you need to ask is:

What is a capital asset?

Many find the definition of capital asset is surprisingly broad.  Including the obvious, such as stocks and bonds, pretty much everything you own for personal, or investment purposes actually qualifies as a capital asset.  This includes your home, household furnishings, and any vehicles you may own.  Other common investment properties such as collectables, jewelry, real estate, and valuable metals all qualify as capital assets for the purposes of the capital gains tax.  Pretty much any piece of capital acquired, and then later sold for a profit or loss, will qualify.

What is a net capital loss?

A capital loss is generally incurred when you sell an asset for less than the amount you paid for when originally purchased.  Note you will need to determine your “adjusted basis” for more complicated capital investments, such as real estate property you have made significant improvements on over the life of the investment.  The adjusted basis will include additional expenditures incurred improving the property and serve as the basis against which the sale price is set to determine loss or gain.  Far from just a loss, net capital losses in which you lost more than you gained for a year can be quite useful.  You can use net capital losses as an offset on the amount of tax which you need to pay on your income.  The amount you can use is capped at $3000 a year, however any additional unused loss rolls over into the next year.  This means significant losses can have a serious impact on the amount of taxes you will need to pay on your income for years to come.  Note that there are some rules regarding liquidating assets to incur a loss to only then reacquire the asset in a short time period, so be sure to inform yourself before using net capital losses as a tax strategy.  

Do you need to pay capital gains tax on cryptocurrency?

As an exciting new emerging investment area, the question has been posed: how will cryptocurrency be taxed?  Given the broad definition of capital asset employed by the IRS, it should come as no surprise that cryptocurrency, often treated like traditional stocks for the purposes of investment, qualifies as a capital asset.  It is important to keep in mind then that every separate cryptocurrency transaction will be subject to capital gains tax.  This includes setup transactions where an exchange user purchases a more popular cryptocurrency with USD, then transfers this value into their intended cryptocurrency on an exchange.  Be sure to keep a crypto ledger documenting all transactions you make, with the value, date of purchase, and date of sale readily available to assist with calculating taxes.

What is short term vs. long term for capital gains tax?

The capital gains tax outlook is different depending on the length of time you have held the particular asset being taxed.  The duration of time determines whether the gains or losses qualify as “short-term” or “long-term.”  For most capital assets, anything after a year, meaning a year from the date you bought the asset to the date you sold and realized the gain or loss, is considered long-term.  Notable exceptions to this rule exist, and include property acquired via gift, property inherited from a decedent, and commodity futures.  Capital assets held for a year or less qualify as short-term gains or losses.  Capital gains taxes only apply to long-term capital gains.  This means any capital asset held for a year or less is taxed at as normal income, with the graduated federal income tax applying.  Generally, capital gains tax is much lower than what you would otherwise be paying depending on your tax bracket, so it can be a good call to hold on to your assets for over a year.

Do I have to pay capital gains tax when I sell my home?

Your primary residence does qualify as a capital asset for the purposes of capital gains tax, but it likely qualifies for a considerable capital gains tax exemption.  Note this exemption only applies to your main home, and you can only have one main home at a time.  If you split your time between multiple residences, generally the one you spend the most time at will qualify for the exemption, but if there is still no clear winner other factors important to IRS include which address is listed on your voter registration card, federal and state tax returns, and driver’s license or car registration.  The exemption is up to $250,000 for individuals and $500,000 for married couples who filed jointly.  This exemption applies to the net capital gain from your home sale, meaning that if you made less than a $250,000 profit you will not owe capital gains tax on the sale.  Note that generally, when a house is transferred as part of a divorce, this transfer does not qualify as a realization event for capital gains tax.  This means you would owe no capital gains tax but also not receive any net capital losses.

What is the federal capital gains tax rate 2020, 2021?

Like the federal income tax, the federal capital gains tax rate is graduated, with big earners paying a higher rate.  In 2021, for an individual earning less than $40,000 a year, or a married couple who file jointly earning $80,000, the capital gains tax is 0%.  This means no capital gains tax is owed at the federal level if your income is below these benchmarks.  Individuals earning between $40,001 to $441,450, and married couples filing jointly making $80,001 to $496,600, face a 15% capital gains tax.  Anyone earning beyond $441,450, and for married couples $496,600, face a capital gains tax rate of 20%.  

These numbers rose slightly for the year 2021.  The cutoff for not owing any capital gains tax is now $40,400 for individuals and $80,800 for married couples filing jointly.  The 15% rate applies to individual earners between $40,401 and $445,850 and married couples earning $80,801 to $501,600.  Beyond $445,850 for individuals and $501,600 for married couples the 20% tax rate will apply on all additional income.

Note that certain types of investments qualify for unique capital gains tax rates.  Collectables, such as stamps, art, or jewelry, are taxed at a higher rate of 28%.  This is regardless of whether you qualify for one of the lower tax brackets discussed above.  Real estate is subject to unique circumstances as well, with taxpayers able to factor in the natural depreciation of their property against the amount they will need to pay in capital gains tax.

What is a net investment income tax?

Beyond the capital gains tax, the federal government imposes an additional tax on investment income.  The Net Investment Income Tax is a 3.8% surtax on investment income for taxpayers whose total income is above a certain threshold.  For individuals this is $200,000, and for married couples filing jointly this is $250,000.  Note that the IRS uses something called your modified adjusted gross income to calculate whether you reach this threshold, but unless you are earning money or deductions in foreign countries, this is likely to just be the adjusted gross income you used for your federal income tax payment.

What is the Illinois capital gains tax rate 2020, 2021?

Like many states, Illinois charges its own capital gains tax on state residents who have earned income from realizing capital gains.  Illinois levies a 4.95% flat rate on all capital gains.  Unlike the federal government, Illinois’ capital gains tax rate is not graduated, so the 4.95% tax applies regardless of your overall income level.  Comparatively, this rate is significantly lower than the high end of state capital gains tax rates, with the highest state capital gains tax being California’s at 13.30%.

What is the Iowa capital gains tax rate 2020, 2021?

Iowa is a somewhat different story.  Iowa has a relatively high capital gains tax rate of 8.53, but the amount an individual actually needs to pay will generally be lower as the state allows a deduction for federal income tax.  In a nod to the state’s agricultural industry, Iowa also has cutouts to its capital gains tax where family-owned business that have operated for a significant amount of time are eligible for certain exemptions.

When should I realize capital gains?

Since timing plays a significant role in the amount of capital gains tax you will need to pay, it is important to figure out the best time to realize your gains.  Generally, avoiding federal income tax by holding on to your investment for over a year when possible is very favorable, as the capital gains tax rate is likely to be significantly lower than the income tax bracket you would otherwise need to pay under.  Beyond this, you need to consider your overall income for the year.  Keep in mind the graduated nature of federal capital gains tax, with lower incomes either being exempt or facing a lower a tax rate, as well as the 3.8% surtax on incomes above a certain threshold.  This can make it favorable to hold on to your investment until a point you are either partially or totally retired, when you could qualify for a lower rate, or time realizing your gains with off years when your personal income is low.  

What is the future of capital gains tax?

With President Biden entering his first year in the White House, the federal capital gains tax could look very different in the near future.  As part of a broader reform of federal tax policy, President Biden has voiced his desire to see capital gains taxed as ordinary income for taxpayers earning more than $1,000,000.  If passed into law, this reform would see the long-term capital gains distinction removed for income past this threshold, with capital gains now treated as normal income.  In conjunction with this proposal, President Biden has also expressed a desire to see the top rate of the federal income tax reinstated at 39.6%.  This would constitute a raise on capital gains for this tax bracket of 19.6%.  However, the proposal does not end with simply raising the rate but would take a further step to ensure that taxes cannot be avoided by bequeathing capital assets at death.  In order to close a perceived loophole capital gains tax reform advocates have decried as tax avoidance, all unrealized gains over the life an investment would be taxed upon the death of the taxpayer.  If these proposals become law, they will radically change the landscape of federal capital gains tax, and could prompt state law makers to follow suit, raising their own capital gains tax rates and tightening when they will need to be paid.

Request a consultation with an estate planning and tax lawyer.

If are looking to create an estate plan and have capital gains tax considerations, please do not hesitate to contact our experienced attorneys.  We can help you create the best plan for your goals. Call our office at (630) 324-6666 or schedule a consultation with one of our experienced estate planning lawyers today. You can also fill out our confidential contact form and we will get back to you shortly.

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