Part of being financially savvy is knowing exactly what kind of tax bill you may face for different income levels or investments. While some parts of the U.S. tax code may be fairly straightforward, there are some exceptions you should be aware of in case it applies to you.
How capital gains taxes work
For starters, many investments follow traditional capital gains tax rates. Short-term capital gains — those held under one year — are taxed at regular income tax rates. Investments held longer than one year are given a favorable tax treatment and are much more straightforward. There are three primary capital gains tax brackets:
|Capital Gains Rate||Income Range (Single)||Income Range (Married Filing Jointly)|
|0%||$0 to $40,400||$0 to $80,800|
|15%||$40,401 to $445,850||$80,801 to $501,600|
|20%||$445,851 or more||$501,601 or more|
For example, if you bought shares of a company for $1,000, held them for nine months, and then sold them for $1,500, you’d owe your income tax percentage on the $500 profit. If you bought those same shares and held them for two years before selling, you’d owe your capital gains rate. While the vast majority of investments fall into these straightforward capital gains brackets, there are three exceptions you should know about in case it applies to you.
1. How collectibles are taxed
Collectibles — such as rare items, artwork, gold and silver coins, stamps, and antiques — are considered alternative assets by the IRS. Let’s say you bought a piece of art for $10,000 and later sold it for $50,000. Assume that you’re in the highest ordinary income tax bracket. Under normal circumstances, you’d pay 20% on the $40,000 profit ($8,000). However, since art is considered a collectible, you’d pay a higher 28% rate, making your tax bill $11,200.
While normal exchange-traded funds (ETFs) are taxed at regular capital gains rates, ETFs that are backed by gold or silver fall into the collectibles category and also face the 28% rate, so make sure you don’t underestimate your potential tax bill by using your typical capital gains rate to calculate what you owe.
2. How qualified small business stock is taxed
If you sell shares of a qualified small business stock (QSBS), the greater of $10 million or 10 times your adjusted basis — the cost you paid for them — is free from capital gains taxes if you’ve held it for at least five years (unless the business is operating …….