Hey there! If you’re wondering about capital gains tax rates for 2021 you’ve landed in the right place. As someone who’s been navigating the complex world of investment taxes for years, I can tell ya that understanding capital gains tax is super important for maximizing your investment returns.
In this article, I’ll break down everything you need to know about capital gains tax in 2021 – from the basic rates to smart strategies that could help you minimize your tax burden. Whether you’re selling stocks real estate or other investments, knowing these rates ahead of time can save you thousands.
Let’s dive in!
What Is Capital Gains Tax?
Before we jump into the specific rates for 2021, let’s clarify what capital gains tax actually is.
Capital gains tax is basically a fee the government charges on the profit you make when you sell certain assets. Almost everything you own for personal or investment purposes can be considered a capital asset – your home, stocks, bonds, artwork, and more.
When you sell one of these assets for more than what you paid for it, the difference is your “capital gain,” and that’s what gets taxed Simple, right?
For example:
- You buy stocks for $10,000
- Later, you sell them for $15,000
- Your capital gain is $5,000
- You’ll pay capital gains tax on that $5,000 profit
Important to note: You only pay capital gains tax when you actually sell the asset. If your stocks or property increase in value but you continue holding them, you don’t owe any tax on that “unrealized” gain.
Short-Term vs. Long-Term Capital Gains
One of the most important distinctions in capital gains tax is between short-term and long-term holdings. This distinction can dramatically affect how much tax you’ll end up paying.
Short-Term Capital Gains (One Year or Less)
If you hold an asset for one year or less before selling it, any profit is considered a short-term capital gain. These gains are taxed at your ordinary income tax rate, which can be as high as 37% depending on your income bracket. Ouch!
Long-Term Capital Gains (More Than One Year)
This is where patience pays off! If you hold an asset for more than one year before selling, your profit qualifies as a long-term capital gain. These gains enjoy much lower tax rates – 0%, 15%, or 20% depending on your income.
The tax code is basically encouraging long-term investment over short-term speculation. Smart investors can use this to their advantage!
2021 Long-Term Capital Gains Tax Rates
The capital gains tax rates for 2021 depend on your filing status and taxable income. Here’s the breakdown:
For Single Filers:
- 0% rate: Income up to $40,400
- 15% rate: Income between $40,401 and $445,850
- 20% rate: Income over $445,850
For Married Filing Jointly:
- 0% rate: Income up to $80,800
- 15% rate: Income between $80,801 and $501,600
- 20% rate: Income over $501,600
For Head of Household:
- 0% rate: Income up to $54,100
- 15% rate: Income between $54,101 and $473,750
- 20% rate: Income over $473,750
For Married Filing Separately:
- 0% rate: Income up to $40,400
- 15% rate: Income between $40,401 and $250,800
- 20% rate: Income over $250,800
Special Capital Gains Rates for Specific Assets
Some types of capital assets have their own special tax rates:
- Collectibles (like art, coins, stamps): Maximum 28% rate
- Section 1202 Qualified Small Business Stock: Maximum 28% rate
- Unrecaptured Section 1250 Gain (from selling real estate): Maximum 25% rate
Additional Tax Considerations for 2021
Net Investment Income Tax (NIIT)
Don’t forget about the additional 3.8% Net Investment Income Tax that applies to individuals with modified adjusted gross income above certain thresholds:
- $200,000 for single filers
- $250,000 for married filing jointly
This means your total federal capital gains tax could be as high as 23.8% (20% + 3.8%) for high-income earners.
Capital Loss Deductions
If your capital losses exceed your capital gains in a year, you can use up to $3,000 of the loss ($1,500 if married filing separately) to offset other income. Any additional losses can be carried forward to future tax years.
This is an important strategy for tax planning – sometimes it makes sense to strategically realize losses to offset gains.
Example: Calculating Capital Gains Tax in 2021
Let’s work through a real-world example to see how the 2021 capital gains tax would apply:
Scenario: You’re married filing jointly with a taxable income of $95,000. You sell stocks that you’ve owned for two years at a profit of $20,000.
Calculation:
- Your taxable income falls in the $80,801-$501,600 bracket for married filing jointly
- Your long-term capital gain rate is 15%
- Your capital gains tax would be: $20,000 × 15% = $3,000
Capital Gains Tax on Real Estate in 2021
Real estate investors should be particularly aware of capital gains tax rules, as they can significantly impact your profit margins.
Primary Residence Exclusion
If you’re selling your primary residence, you might qualify for a significant tax break. Single taxpayers can exclude up to $250,000 of gain, and married couples filing jointly can exclude up to $500,000 of gain from their income.
To qualify, you must have:
- Owned the home for at least 2 years
- Lived in the home as your primary residence for at least 2 out of the 5 years preceding the sale
- Not used this exclusion in the past 2 years
Rental and Investment Properties
For investment properties, including rental properties, the primary residence exclusion doesn’t apply. However, real estate investors have other options to reduce capital gains taxes:
- 1031 Exchanges: Defer capital gains by reinvesting in a similar property
- Installment Sales: Spread the gain over multiple years to potentially stay in lower tax brackets
- Converting to Primary Residence: If possible, move into your investment property before selling
Strategies to Minimize Capital Gains Tax in 2021
Here are some practical strategies I’ve used to reduce capital gains tax liability:
1. Hold Investments Longer Than One Year
The simplest strategy is also one of the most effective. By holding investments for more than one year, you can qualify for the much lower long-term capital gains rates instead of short-term rates.
2. Use Tax-Loss Harvesting
If you have investments that have lost value, consider selling them to realize the losses and offset your capital gains. This strategy, known as tax-loss harvesting, can significantly reduce your tax bill.
3. Invest in Tax-Advantaged Accounts
Investments in accounts like 401(k)s, IRAs, and 529 college savings plans grow tax-free or tax-deferred. Consider maxing out these accounts before investing in taxable accounts.
4. Consider Timing of Income and Sales
If possible, plan large capital gains realizations for years when your income is lower. This could potentially drop you into a lower capital gains bracket.
5. Donate Appreciated Assets
Instead of selling appreciated assets and donating cash, consider donating the assets directly to charity. You’ll get a deduction for the full fair market value and avoid capital gains tax entirely.
Important Deadlines for 2021 Capital Gains
Remember these key dates for your 2021 capital gains:
- December 31, 2021: Last day to realize capital gains or losses for the 2021 tax year
- April 18, 2022: Deadline to file your 2021 tax return (or request an extension)
- Quarterly Estimated Taxes: May be required if you have large capital gains and no withholding
Understanding the capital gains tax rates for 2021 is essential for making smart investment decisions. The tiered system (0%, 15%, and 20% for long-term gains) offers significant tax advantages compared to short-term gains, which are taxed as ordinary income.
By planning your investment sales strategically and taking advantage of the various tax minimization strategies we’ve discussed, you can potentially save thousands of dollars in taxes.
Remember, while tax considerations are important, they shouldn’t be the only factor in your investment decisions. The quality of the investment and your overall financial goals should always come first.
Have questions about your specific situation? It might be worth consulting with a tax professional who can provide personalized advice based on your unique circumstances.
Happy investing!
2021 Federal Income Tax BracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. and Rates
In 2021, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Tables 1). The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $523,600 and higher for single filers and $628,300 and higher for married couples filing jointly.
| Tax Rate | For Single Filers, Taxable Income | For Married Individuals Filing Joint Returns, Taxable Income | For Heads of Households, Taxable Income |
|---|---|---|---|
| 10% | Up to $9,950 | Up to $19,900 | Up to $14,200 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 | $14,201 to $54,200 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 | $54,201 to $86,350 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 | $86,351 to $164,900 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 | $164,901 to $209,400 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 | $209,401 to $523,600 |
| 37% | Over $523,600 | Over $628,300 | Over $523,600 |
| Source: Internal Revenue Service | |||
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.
The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subject to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.
The AMT exemption amount for 2021 is $73,600 for singles and $114,600 for married couples filing jointly (Table 3).
| Filing Status | Exemption Amount |
|---|---|
| Unmarried Individuals | $73,600 |
| Married Filing Jointly | $114,600 |
| Source: Internal Revenue Service | |
In 2021, the 28 percent AMT rate applies to excess AMTI of $199,900 for all taxpayers ($99,950 for married couples filing separate returns).
AMT exemptions phase out at 25 cents per dollar earned once taxpayer AMTI hits a certain threshold. In 2021, the exemption will start phasing out at $523,600 in AMTI for single filers and $1,047,200 for married taxpayers filing jointly (Table 4).
| Filing Status | Threshold |
|---|---|
| Unmarried Individuals | $523,600 |
| Married Filing Jointly | $1,047,200 |
| Source: Internal Revenue Source | |
Capital Gains Tax Explained 2021 (In Under 3 Minutes)
FAQ
What is the capital gains tax rate in 2021?
Capital gains rates for individual increase to 15% for those individuals with income of $40,401 and more ($80,801 for married filing joint, $40,401 for married filing separate, and $54,101 for head of household) and increase even further to 20% for those individuals with income over $445,850 ($501,600 for married …
Will capital gains tax be eliminated in 2025?
The 2025 tax law signed by President Trump, known as the One Big Beautiful Bill Act, preserves the existing capital gains tax structure, keeping long-term rates at 0%, 15% and 20%. Although the law leaves capital gains brackets unchanged, it creates the “Trump Account,” a new savings vehicle for children.
How much capital gains tax do I pay on $100,000?
Capital gains are taxed at the same rate as taxable income — i.e. if you earn $40,000 (32.5% tax bracket) per year and make a capital gain of $60,000, you will pay income tax for $100,000 (37% income tax) and your capital gains will be taxed at 37%.
What were capital gains in 2021?
Capital Gains Tax
*Individuals are taxed at 18%/28% on gains on residential property and receipts of carried interest. Trusts and estates are taxed at 28% in these circumstances. **BADR was called Entrepreneurs’ Relief prior to 6 April 2020.