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WalletPrep worksheet · Taxes

How much is capital gains tax?

Name ____________________ Date __________

Key ideas

  1. You are taxed on profit, not the sale. Subtract what you paid (your cost basis) from what you sold for. Only that difference is a capital gain.
  2. Holding more than 1 year lowers the rate. Long-term gains are taxed at 0%, 15% or 20%. Short-term gains are taxed at your regular income tax rate.
  3. Losses can cancel out gains. Sell at a loss and it offsets gains. Up to $3,000 of extra loss a year can also lower your other income.

Vocabulary

Capital gains
The profit when you sell an investment for more than you paid. It is taxed when you sell, in a regular brokerage account.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
Brokerage account
An investment account where you can buy and sell stocks, bonds, ETFs and mutual funds. It has no special tax benefits.
Cost basis
What you paid for an investment, including reinvested dividends. Your taxable gain or loss when you sell is the sale price minus your cost basis.

Work it out

Priya is single with $60,000 of taxable income from her job. She sells index fund shares in a brokerage account for $10,000. She paid $6,000 for them.

  1. Sale price
  2. Cost basis
  3. Capital gain
  4. Tax if short-term (22%)
  5. Tax if long-term (15%)
  6. Saved by holding over 1 year

Check yourself

  1. You bought shares for $2,500 and sell them for $4,000 after 2 years. Your long-term rate is 15%. What is the federal tax?

    • A. $600
    • B. $375
    • C. $225
    • D. $150

  2. You bought shares on March 3 and sell them on March 3 one year later. What kind of gain is it?

    • A. Short-term, taxed at your regular rate
    • B. Long-term, taxed at 0%, 15% or 20%
    • C. No gain, because it was exactly 1 year

  3. Which sale creates capital gains tax this year?

    • A. Selling a fund inside your Roth IRA
    • B. Selling a fund inside your 401(k)
    • C. Selling shares in a regular brokerage account for a profit
    • D. Holding shares that rose 30% without selling

Your turn

Log in to your brokerage account and open the cost basis or unrealized gains page. For anything you might sell this year, note the purchase date and the gain, and mark which lots turn long-term soon.

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Answer key

How much is capital gains tax?

Work it out

  1. Sale price$10,000
  2. Cost basis− $6,000
  3. Capital gain= $4,000
  4. Tax if short-term (22%)$880
  5. Tax if long-term (15%)− $600
  6. Saved by holding over 1 year= $280
  1. Her gain is $10,000 − $6,000 = $4,000. Only that profit is taxed.
  2. Her income is already past the 0% line, so a long-term gain is taxed at 15%: $4,000 × 15% = $600.
  3. Held 1 year or less, the gain lands in her 22% bracket: $4,000 × 22% = $880. Waiting saves $880 − $600 = $280.

Check yourself

  1. C. $225 The gain is $4,000 − $2,500 = $1,500. At 15%, $1,500 × 15% = $225. The tax is on the profit only.
  2. A. Short-term, taxed at your regular rate Long-term needs more than 1 year. Selling on March 4 or later would have made it long-term.
  3. C. Selling shares in a regular brokerage account for a profit Only a sale for a profit in a taxable account creates a capital gain. Trades inside retirement accounts and paper gains are not taxed this way.