A client reached out this week regarding a short-term cash need. As we discussed the various ways to obtain liquidity, the subject of capital gains and the related taxation came up. This can be a confusing topic and is also one that is in the news as of late as it has become a key campaign issue. Let’s take a look at the current tax structure and discuss how it may change in the future.

Note: a past post discusses the basics of capital gains and ways to mitigate them. You can revisit that here

Capital Gains – A Few Basics

A capital gain is the profit realized on the sale of an asset (price you sold it for less your cost basis = capital gain). Simply put, if you sell an asset for more than you paid for it, the current US tax code calls for you to pay a portion of that gain to the government via capital gains tax.

Capital gains tax applies to a variety of investments, including stocks, mutual funds, and real estate. However, keep in mind that capital gains within certain investment accounts (401ks and IRAs) are not subject to capital gains tax. There are also certain capital gain tax breaks/exemptions, such as gains on the sale of your primary residence.

The tax code differentiates between short term capital gains (gains on assets held less than a year) and long-term capital gains (gains on assets held over a year).

Current Capital Gains Taxation

The first step in determining your capital gains tax is to net all capital gains and losses together. You first offset “like with like” (ie: long term losses offset long term gains, short term losses offset short term gains). Once you’ve netted each category, if you have a loss in one category and gain in the other, you can further offset them (as well as apply any prior year loss carryfowards).

You may end up with a variety of outcomes after netting but for purposes of this post, let’s assume that after netting, you have both net short term gains and net long term gains.

Net short term gains (gains on assets held less than a year) will be taxed at your ordinary income tax rate (same rate as your wages, IRA distributions, and interest income). You can see the 2024 federal income tax brackets here

For net long term gains (gains on assets held more than a year), the taxation is lower and is either 0%, 15%, or 20% based upon income. For instance, a married couple in 2024 will pay 0% capital gains tax if their income (including the capital gain) is below $94,050, 15% from $94,051-$583,750, and 20% above $583,751

There is also an additional Net Investment Income tax that may come into play (kicks in for married couples on income above $250,000 including the capital gains) and is another 3.8%.

The above only covers the federal income taxes on capital gains. Depending on your state, you may also owe capital gains taxes at that level as well. As you can see, depending on your other income and the extent of your gains, these taxes can become significant.

Future Capital Gains Taxation

As you are well aware, there is an upcoming presidential election and the two candidates have differing tax policies proposed to take effect once the current tax cuts expire in 2025. It is possible there could be increases both in the federal income tax rates (that would impact short term capital gains rates) as well as the long-term capital gains rate (that would impact long term capital gains). It’s too early to predict this with any certainty – especially as it seems likely we may end up with a split government. But it you are carrying meaningful gains, taking some off the table while you are certain what the rate structure is and can “do the math” may not be a bad approach! But as always, work with your financial and tax advisors before taking action!