If you’ve ever owned – and then sold – an investment asset for profit, you likely paid taxes on those gains. At the federal level, those gains will either be taxed at your ordinary income rate (for short-term holds of less than one year) or at the capital gains rate (for long-term holds of more than one year).
But are those capital gains taxed twice? It depends. When it comes to traditional asset investments (such as stocks), proceeds from the sale can be taxed twice, once at the corporate level and again at the personal level.
Then there are capital gains at the state level. And this is where things can get a little trickier.
The Capital Gains Explanation -- Nationally
According to the IRS, capital gains occur if you sell an asset for more than that asset’s adjusted basis. The adjusted basis is described as what you originally paid for the asset, plus improvements, additions, or depreciation incurred while you own the asset. Capital gains taxes are paid for the year during which they are realized. In other words, when you receive the profits from the sale, you pay the tax.
As mentioned above, those capital gains will either be defined as short-term or long-term, depending on how long you owned the asset. In most cases, a longer-term hold is more advantageous, as the tax rate can be lower, depending on your tax bracket.
Trying to Localize
There are 50 states in America, in addition to the District of Columbia. And each of these states has its own method when it comes to taxing capital gains. For instance:
- Many states tax capital gains as income; this applies to long- and short-term capital gains.
- Some states don’t levy a capital gains tax – think Texas, Florida, and Nevada, among others. These states also don’t tax personal income on wages, but might tax investment interest and dividends.
- States also have special rules applying to the sale of certain assets, such as exclusions for collectibles purchased prior to a specific year.
Furthermore, capital gains tax rates vary by state. They can range from 0% (Alaska, Florida, and Texas) to 13.3% (California). Then there are states – like Hawaii – that tax capital gains at a lower rate than ordinary income.
And Vermont residents may be allowed to deduct 40% of their capital gains on long-term assets held over three years at a maximum of $350,000, as long as that amount doesn’t exceed 40% of federal taxable income.
Think Before Filing
Capital gains taxes are an important part of understanding investment strategy. While the federal rules regarding these taxes are fairly straightforward, these regulations vary a great deal based on where you live. As always, it’s a good idea to check with a tax advisor who understands state tax rules when it comes time to file your taxes.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
FAQs
The taxation of capital gains places a double tax on corporate income. Before shareholders face taxes, the business first faces the corporate income tax.
Do I get taxed twice on capital gains? ›
Double taxation occurs when a corporation pays taxes on its profits and then its shareholders pay personal taxes on dividends or capital gains received from the corporation. A financial advisor can answer questions about double taxation and help optimize your financial plan to lower your tax liability.
How do I avoid double taxation on capital gains? ›
How to Avoid Double Taxation
- Retaining corporate earnings. You can avoid double taxation by keeping profits in the business rather than distributing it to shareholders as dividends. ...
- Pay salaries instead of dividends. You can distribute profit as salaries or bonuses instead of as dividends. ...
- Split income.
Long-term capital gains can't push you into a higher tax bracket, but short-term capital gains can. Understanding how capital gains work could help you avoid unintended tax consequences. If you're seeing significant growth in your investments, you may want to consult a financial advisor.
Is the capital gains tax a form of double taxation? ›
The United States' tax code places a double-tax on corporate income with one tax at the corporate level through the corporate income tax and a second tax at the individual level through the individual income tax on dividends and capital gains.
What is the 2 year rule for capital gains tax? ›
If you have lived in a home as your primary residence for two out of the five years preceding the home's sale, the IRS lets you exempt $250,000 in profit, or $500,000 if married and filing jointly, from capital gains taxes. The two years do not necessarily need to be consecutive.
Why am I getting double taxed? ›
Most commonly, double taxation happens when a company earns a profit in the form of dividends. The company pays the taxes on its annual profits first. Then, after the company pays its dividends to shareholders, shareholders pay a second tax.
Is capital gains tax in addition to regular income tax? ›
Short-term capital gains are taxed at the same rate as your ordinary income. Meanwhile, long-term gains are taxed at either 0%, 15%, or 20%.
Are capital gains included in adjusted gross income? ›
Adjusted gross income, also known as (AGI), is defined as total income minus deductions, or "adjustments" to income that you are eligible to take. Gross income includes wages, dividends, capital gains, business and retirement income as well as all other forms income.
Do capital gains count as earned income? ›
Unearned Income. Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust.
Under the terms of a Double Taxation Agreement ( DTA ), or unilaterally, relief by way of credit for foreign tax paid ( FTCR ) is available against United Kingdom ( UK ) Capital Gains Tax on the same gains. Alternatively, the foreign tax may be deducted in calculating the gain or loss on a particular disposal.
Are long-term capital gains considered income? ›
Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate. A capital gain is realized when a capital asset is sold or exchanged at a price higher than its basis.
What are two types of capital gains tax? ›
Capital gains fall into two categories: Short-term: Gains realized on assets that you've sold after holding them for one year or less. Long-term: Gains realized on assets that you've sold after holding them for more than one year.
Can you be taxed on the same money twice? ›
Double taxation refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time. Double taxation can be economic, which refers to the taxing of shareholder dividends after taxation as corporate earnings.
Do you pay both state and federal taxes on capital gains? ›
Capital gains are taxable at both the federal level and the state level. At the federal level, capital gains are taxed at a lower rate than personal income.
How many times do you have to pay capital gains? ›
In most cases, you must pay the capital gains tax after you sell an asset. It may become fully due in the subsequent year tax return. In some cases, the IRS may require quarterly estimated tax payments.
How are capital gains taxed? ›
Capital gains can be subject to either short-term tax rates or long-term tax rates. Short-term capital gains are taxed according to ordinary income tax brackets, which range from 10% to 37%. Long-term capital gains are taxed at 0%, 15%, or 20%.
If you’ve ever owned – and then sold – an investment asset for profit, you likely paid taxes on those gains. At the federal level, those gains will either be taxed at your ordinary income rate (for short-term holds of less than one year) or at the capital gains rate (for long-term holds of more than one year).