How Short-Term and Long-Term Capital Gains Taxes Are Levied

Michael Mundaca

Michael Mundaca

An experienced tax professional, Michael Mundaca is currently the co-director of the National Tax Department and the Americas Tax Center at Ernst & Young LLP. Previously the assistant secretary for tax policy at the U.S. Treasury, Michael Mundaca has taken part in the national debate on tax issues such as the capital gains tax.

The capital gains tax is the tax paid on profits from the sale of capital assets including shares, real estate, and artistic works. The profits are calculated as the difference between an asset’s selling price and its basis (in general, purchase price plus cost of improvement and commissions minus depreciation).

The tax is levied differently depending on whether the gains are considered long-term or short-term. The long-term capital gains tax is paid on assets sold at a profit after being held longer than one year. Short-term capital gains tax is paid on assets sold at a profit after being held for a year or less.

As of 2016, short-term capital gains do not benefit from any special tax rate; they are taxed the same as ordinary income. If, for example, a piece of land is sold at a profit after being held for one year, the profit generally will be treated as taxable income, and the applicable rate will depend on whether the seller falls into the 10-, 15-, 25-, 28-, 33-, 35-, or 39.6- percent tax range. A 3.8% tax on net investment income may also apply.

Long-term capital gains on most assets for tax payers in the 10 and 15 percent tax bracket are tax-free. Taxpayers in the 25 to 35 percent brackets will pay capital gains tax at a rate of 15 percent. For taxpayers in the 39.6 percent bracket, their capital gains rate is set at 20 percent. A 3.8% tax on net investment income may also apply.

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