When I said that the current capital gains tax rate is 0% for some taxpayers, a reader, Colin, was shocked. He states:

I had no idea long term capital gains are presently 0%. Are you sure?

Yes, Colin, I’m sure! Let’s take a closer look at capital gains and the capital gains tax rates.

Capital Assets

The IRS has a pretty broad view on capital gains, which come from capital assets. Their definition is:

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

Capital Gains Tax

Capital gains taxes are figured when you sell your capital assets. Here’s how it works:

Capital Gains and Losses. When you sell capital assets, if you sell it for more than you paid for it, you have a capital gain; if you sell it for less, you have a capital loss.

Reporting Capital Gains. You must report all capital gains on Schedule D, including investment or personal use property.

Deducting Capital Losses. Capital losses can be deducted on investment property, but not personal use property. Capital losses first offset gains, then are deducted from income. The limit is $3,000 per year; you can carry forward any additional amounts to the future.

Long Term Capital Gains. Capital gains can be classified as long term capital gains if the property is held for more than one year. Long term gains will get preferential tax treatment, including the 0%.

Capital Gains Tax Exclusions. There are some exclusions, one of the most popular of which is your home. You can exclude $250,000 ($500,000 for couples) in capital gains on the sale of your home if you lived in it for 2 of the last 5 years.

Updated 2013 Capital Gains Tax Rate

The capital gains tax rates for 2013 are:

Tax Bracket Short Term Capital Gains Tax Rate Long Term Capital Gains Tax Rate
10% 10% 0%
15% 15% 0%
25% 25% 15%
28% 28% 15%
33% 33% 15%
35% 35% 15%
39.6% 39.6% 20%

Capital gains are different from dividends, but long term capital gains rates are similar to dividend tax rates for qualified dividends.

0% Capital Gains Tax Rate

Obviously, you do need to be in the bottom two tax brackets to take advantage of the 0% capital gains tax rate. However, if you are close, you may want to do some careful planning and maximize some income shifting and retirement contributions to take advantage of it. Even if you don’t qualify for the 0% capital gains tax, you will still get the lower 15% capital gains tax.

2013 Capital Gains Tax Rate

Update: The 2013 capital gains tax rates changed with the Fiscal Cliff Deal.



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Comments to 0% Capital Gains Tax Rate Really Exists

  1. How does this work. If I have no earned income but cash in $250,000 in capital gains do I still get the 0% capital gains rate? Or does the $250,000 capital gains push me into the higher rate?

    michael

  2. If you are MFJ, the first $68k of your gains would be taxed at 0% federal since that is the cutoff for the 25% tax bracket. Anything above $68k would be taxed at 15% federal.

    - My state of CA doesn’t have a cap gains rate, so the $250k would be taxed as ordinary income (up to 9.55%).

    - You have deductions and exemptions that will decrease your taxable income. Standard deduction of ~$11k (for MFJ) and exemptions of ~$7k (or more if kids) will allow $84k or more of tax-free gains. Note that exemptions start to phaseout for income > $250k.

    - Any other income, earned or passive, will decrease the tax-free amount, of course. If you have W2, interest, and other income such that your net taxable income is $68k, you won’t get any 0% cap gains rate.

    I own a C corp. I paid myself nothing the last 3 years and just harvested my cap gains and declared dividends such that I was able to get about $300k out federally tax free. I still paid about $25k in CA taxes, though.

    Eric

    • @Eric: Interesting approach. But unless I’m missing something, you still have to pay corporate income tax on those dividends, right? So your tax savings on dividends is [(personal income tax rate) - (corporate income tax rate + dividend tax rate)]*DividendAmount, right?
      And you can’t be a personal services corp, and still need to pay yourself a salary if you actively participate.

      Still, seems like with a low dividend tax rate, you could get some savings depending on tax bracket.

      James

  3. I have what I think is a unique situation. I earn roughly $21k a year, however, I am lucky enough to have $50k in stock of which easily $45k is capital gains. Also, this is a long term holding greater than 5 years.

    If I want to sell this stock (and this assumption being based on the stock market remaining flat) would I be best suited to pay the least amount of taxes if I were to sell about $8k this year at a 0% tax rate and then sell the rest of the stock next year when the qualified five-year taxrate for my bracket drops to 8%?

    Jason

  4. My 93-yr-old mother bought house in SoCal in 1966 for $39k, now worth $1.5m. Her pension income (her own + that of my late father) totals $68k/yr. She has assets (stocks/bonds) of $150k. I’m trying to help her estimate CGT. Help!

    K. I. Davis

  5. My 4 year-old son has about $8000 in mutual funds. Question we have is could we sell these each year to reset the basis and still not have to pay any capital gains (obviously only in years that there is a gain)since he doesn’t have any earned income?

    Jeremy


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