On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
To take advantage of the long-term capital gains rates, you need to hold the asset longer than one year. The long-term rate depends on two things: your marginal tax rate and how long you have held the asset. The lower preferential capital gains rates do not apply to gains from collectibles (stamp collections, coins, art work, etc.) and gain attributable to depreciation recapture on sales of certain real estate. The rates shown below currently apply.
If your marginal rate is 15% or under—Your long-term capital gains rate will be 0% for property held longer than one year.
If your marginal rate is 25% to 35%—Your long-term capital gains rate will be 15% for property held longer than one year.
If your marginal rate is 39.6%—Your long-term capital gains rate will be 20% for property held longer than one year.
When figuring how long you’ve held an asset, start counting on the day after you acquire the property. The day that the property is disposed of is counted as part of the holding period. So, for example, if you bought stock on February 7 of Year 1 and sold it on February 7 of Year 2, your holding period would be one year, and any gain on the sale would not be eligible for the preferential capital gains rates. But if the sale was on February 8 of Year 2 or later, you would have held the stock long-term and the lower rates would apply. For securities traded on an established market, such as the New York Stock Exchange for example, your holding period begins on the day after the trade date of the purchase and ends on the trade date of the sale.
If you own shares of the same stock purchased at different times and prices and can specifically identify those blocks of stock, it may be to your benefit to pick the block of shares you sell based on their cost and holding period. If you cannot specifically identify them, then the first-in first-out rule applies. Shareholders of mutual funds may choose to average the cost basis of shares bought at different times; for holding period purposes the mutual fund shares that are sold are considered to be the ones acquired first. When deciding whether to take a gain or hold for long-term rates, you should compare the savings associated with long-term rates to the financial risk of continuing to hold the investment.
Taxpayers in the 15% or lower tax brackets with unrealized long-term capital gains should develop strategies to take advantage of the “zero” tax rates, possibly cashing in on existing gains while avoiding any federal tax on the gains.
Owners of homes used as their principal residence with gains exceeding the $250,000/$500,000 exclusion limits, and owners of second homes which do not qualify for the home sale gain exclusion, will especially benefit from the these reduced rates. However, be aware of the 3.8% surtax on net investment income that will apply to the portion of the gain from a home that cannot be excluded. This surtax won’t apply if your modified adjusted gross income is less than $200,000 ($250,00 if married filing jointly or $125,000 if married filing separately).