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link8822
Level 2

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

I know that long term gains are based on your total taxable income.  But I'm confused on how the tax is calculated if a little bit of the long-term gains goes beyond the $40,000 threshold.

For example, suppose I have no taxable income other than $10,000 of short-term capital gains from stocks and $45,000 of long-term capital gains from stocks (i.e. 55,000 total in taxable income). 

Assume we use these 2020-2021 rates:
Income tax brackets:
0 to 9875 = 10%
9875 to 20125 = 22%

Long term capital gains:
0 to 40,000 = 0%
40,000 to 441,450 = 15%

Would the calculation be...
A)
Regular income tax from short-term gains = 9,875*0.1+(10,000-9,875)*0.12 = $1002.5
Long term cap gains tax = (45,000 - 10,000) * 0.0 + (55,000 -40,000)* 0.15 = $2250
Total = $3252.5

OR
B)
Regular income tax from short-term gains = 9,875*0.1+(10,000-9,875)*0.12 = $1002.5
Long term cap gains tax = $45,000 *.15 = $6,750
Total = $7,752.5

Or is it something different?  I'm assuming that the regular income tax gets taxed "first" in the above examples (i.e. as opposed to having all of the short term gains taxed at 22% if it were taxed "second"). But I'm confused even after lots of googling.

Any help would be really appreciated! 

1 Best answer

Accepted Solutions
jtax
Level 9

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

Basically there several LTCG rates (e.g. 0%, 15%, 20%) each of which applies to certain brackets of income. Using round numbers for singles in 2019, %0 for $0 to $40k, 15% from $40k to $440k, 20% over that. (plus possible net investment income tax for higher earners but that isn't applies to all income not just capital gains.) 

Ordinary income fills up these brackets first and is taxed at regular income rates. LTCG then fills up the remaining and is taxed at the special rates.

 

Again, simplifying, if you had $30k of ordinary income and $100k of capital gains you would pay ordinary rates on $30k, 0% on $10k and 15% on $90k. 

If you had $60k of ordinary income and $100k of LTCG it would be ordinary rates for $60k plus 15% of $100k

 

See the worksheet on Schedule D (instructions at page D-16) for the super complicated calculation. https://www.irs.gov/pub/irs-pdf/i1040sd.pdf


See this for a general description: https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/

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6 Replies
DavidD66
Employee Tax Expert

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

Short-term capital gains are taxed as ordinary income according to federal income tax brackets.  Long term capital gain tax rates are determined by your taxable income.  If your taxable income is $41,000, your long term capital gain rate is 15%.  If your taxable income is $39,000, your long term capital gain rate is 0%.

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jtax
Level 9

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

Basically there several LTCG rates (e.g. 0%, 15%, 20%) each of which applies to certain brackets of income. Using round numbers for singles in 2019, %0 for $0 to $40k, 15% from $40k to $440k, 20% over that. (plus possible net investment income tax for higher earners but that isn't applies to all income not just capital gains.) 

Ordinary income fills up these brackets first and is taxed at regular income rates. LTCG then fills up the remaining and is taxed at the special rates.

 

Again, simplifying, if you had $30k of ordinary income and $100k of capital gains you would pay ordinary rates on $30k, 0% on $10k and 15% on $90k. 

If you had $60k of ordinary income and $100k of LTCG it would be ordinary rates for $60k plus 15% of $100k

 

See the worksheet on Schedule D (instructions at page D-16) for the super complicated calculation. https://www.irs.gov/pub/irs-pdf/i1040sd.pdf


See this for a general description: https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/

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link8822
Level 2

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

Thank you so much, jtax!! That's the answer that really helps me out because it was so confusing every time I hear something like "15% above 40k", but no clarification on if it's progressive like the ordinary income tax brackets.  Very helpful~ thanks so much again! 😃

jtax
Level 9

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

You're welcome. It didn't used to be that complicated. There was a time when a 20% rate actually meant 20% period. But then they added the lower rates and to reduce the cost (and limit them to lower incomes) they did it this way. Too complicated if you ask me.

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anilj
Level 2

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

Thanks for your insights @jtax. also, to cement this further with another example. If you have ordinary income of $400K and $100 LTCG, it would end up being:

 

$400K ordinary income rates

$40K 15% LTCG

$60K 20% LTCG

 

Does that sound right? So in essence to the original poster's question, CG taxes are progressively taxed also.

Anonymous
Not applicable

Are long-term capital gains calculated progressively? If so, how does the calculation work when you have a mix of short & long-term gains?

It's complicated since the taxes depend on whether the taxpayer is filing as single or joint.  as an approximation, if a single taxpayer who doesn't itemize has AGI of $400K ordinary and $100K long tern gains the tax  on the capital gains would be about $48K tax at 15% and $52K tax at 20% for a total of about $17,700 the tax on the balance of the income would be about $110,900 for a total of about $128,600,

 

 

however, if a joint return the whole $100K of capital gains gets taxed at 15% ($15k) with the tax on the balance of the income being about $82,800 for a total of $97,800.   for purposes of this illustration I used 2019 rates. 

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