No one likes paying taxes. But if you are going to pay taxes, you might as well try to pay as little as you can. That is why the capital gains tax is so awesome. Let me explain how it works.
What Are the Different Ways You Can Be Taxed?
There are LOTS of ways that we are taxed.
- Federal income tax
- State income tax
- Local income tax
- Sales tax
- Estate tax
- Property tax
- Tariffs
- Excise tax
- Phantom tax
- Capital gains tax
- Ordinary income tax on investments
- Etc.
But for the sake of this article, let’s just talk about how investments are taxed.
What is Capital Gains Tax?
For the most part, there are two ways that investments are going to be taxed.
- Ordinary income taxed
- Capital gains taxed
The differentiator is how long you have had the investment.
If you have the investment for more than 1 year, it will generally be taxed at the capital gains rate.
But if you keep the investment for less than one year, you will generally be taxed at the ordinary income rate.
The capital gains rate is less than the ordinary income tax rate. It is lower because it gives the investor the incentive to keep the investment for a longer period of time.
Here is an example:
Harry buys two ETFs on March 15, 2024.
He decided to sell the first ETF on November 30, 2024 and he decided to sell the second ETF the following year on April 1, 2025.
He will be taxed on any GAIN that he has had in the investment over the period.
Because he kept the first ETF for less than a year, he will be taxed at his ordinary income level.
And because he kept the second ETF for more than a year, he will be taxed at the capital gains level.
Your ordinary income tax rate is going to be dependent on your filing status and income primarily. Here is what ordinary income tax rates look like:
For single filers in 2024:
| Tax Rate | Bracket | Tax Owed |
| 10% | $0 to $11,600 | 10% |
| 12% | $11,601 to $47,150 | $1,160 + 12% of income over $11,600 |
| 22% | $47,151 to $100,525 | $5,426 + 22% of income over $47,150 |
| 24% | $100,526 to $191,950 | $17,168 + 24% of income over $100,525 |
| 32% | $191,951 to $243,725 | $39,110 + 32% of income over $191,950 |
| 35% | $243,726 to $609,350 | $55,678 + 35% of income over $243,725 |
| 37% | $609,351+ | $183,645 + 37% of income over $609,350 |
For married filing joint filers in 2024:
| Tax Rate | Bracket | Tax Owed |
| 10% | $0 to $23,200 | 10% |
| 12% | $23,201 to $94,300 | $2,320 + 12% of income over $23,200 |
| 22% | $94,301 to $201,050 | $10,852 + 22% of income over $94,300 |
| 24% | $201,051 to $383,900 | $34,337 + 24% of income over $201,050 |
| 32% | $383,901 to $487,450 | $78,220 + 32% of income over $383,900 |
| 35% | $487,451 to $731,200 | $111,356 + 35% of income over $487,450 |
| 37% | $731,201+ | $196,668+ 37% of income over $731,201 |
For married filing separately filers in 2024:
| Tax Rate | Bracket | Tax Owed |
| 10% | $0 to $11,600 | 10% |
| 12% | $11,601 to $47,150 | $1160 + 12% of income over $11,600 |
| 22% | $47,151 to $100,525 | $5,426 + 22% of income over $47,150 |
| 24% | $100,526 to $191,950 | $17,168 + 24% of income over $100,525 |
| 32% | $191,951 to $243,725 | $39,110 + 32% of income over $191,950 |
| 35% | $243,726 to $365,600 | $55,678 + 35% of income over $243,725 |
| 37% | $365,601+ | $98,334 + 37% of income over $365,600 |
For head of household filers in 2023:
| Tax Rate | Bracket | Tax Owed |
| 10% | $0 to $16,550 | 10% |
| 12% | $16,551 to $63,100 | $1655 + 12% of income over $16,550 |
| 22% | $63,101 to $100,500 | $7,241 + 22% of income over $63,100 |
| 24% | $100,501 to $191,950 | $15,469 + 24% of income over $100,500 |
| 32% | $191,951 to $243,700 | $37,416 + 32% of income over $191,950 |
| 35% | $243,701 to $609,350 | $53,976 + 35% of income over $243,700 |
| 37% | $609,351+ | $181,953 + 37% of income over $609,350 |
Similar to ordinary income taxes, capital gains taxes depend on your filing status and income as well. Here is what the capital gains tax brackets look like:
| Capital Gains Rate | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
| 0% | $0 to $47,025 | $0 to $94050 | $0 to $63,000 | $0 to $47,025 |
| 15% | $47,026 to $518,900 | $94,051 to $583,750 | $63,001 to $551,350 | $47,026 to $291,850 |
| 20% | More than $518,900 | More than $583,750 | More than $551,350 | More than $291,850 |
As you can see, capital gains tax is much more beneficial to the investor.
Final Thoughts
Here is the bottom line IMO. When investing, do what you can to keep your investments for more than 1 year. That way you can pay capital gains tax instead of the higher ordinary income tax. Honestly, you should be only investing in things that you plan on keeping for a very long time anyway.
You can do it!
I am here for you!
Until next time!
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