This article was updated on April 2, 2015.
If you sell an investment for more than you paid to buy it, that profit is known as a capital gain on your investment. Like ordinary income, the profit you receive is subject to taxes, but at the federal level, the rates are often different from those on your earnings from work. The capital gains tax rate in 2014 depends on your overall taxable income, the length of time you've held the investment, and whether you took offsetting losses to charge against some or all of your gain.
What is the capital gains tax rate in 2014?
The capital gains tax rates for 2014 for ordinary investments are as follows:
Short-term gains (gains on assets owned for less than one year plus one day) are taxed at your ordinary income tax rates. Long-term gains (gains on assets owned for at least one year plus one day) are taxed depending on your overall income tax bracket. If your overall income falls in:
the 10% or 15% marginal income tax brackets, then your long-term capital gains tax rate is 0%.
the 25%, 28%, 33%, or 35% marginal income tax brackets, your long-term capital gains tax rate is 15%.
the 39.6% marginal income tax bracket, your long-term capital gains tax rate is 20%.
In addition, the capital gains of high-income earners are subject to a net investment income tax of 3.8%, above and beyond that capital gains tax rate. Those rates kick in at $125,000 if you're married filing separately, $200,000 if you file single or as a head of household, or at $250,000 if you're married filing jointly or a qualifying widow(er) with a dependent child.
Not all assets fall under standard capital gains treatment. Qualified small-business stock and collectibles carry a maximum 28% capital gains tax rate, and recaptured depreciation is taxed at a maximum 25% capital gains tax rate in 2014. The big break in capital gains tax rates generally comes when you sell your home. If you've owned and lived in your home long enough to qualify, you can exclude $250,000 of gain (or $500,000 if married and filing jointly) from being subject to capital gains taxes.
The benefits of losing money
The other thing to note when it comes to capital gains taxes in 2014 is that you can use losses to offset gains, though you can't claim a loss for your taxes on the sale of your primary residence. If you have more losses than gains, up to $3,000 of losses can go to offset ordinary income, and the rest of your losses carry forward to your next tax year.
Be careful with taking losses, though, because of something known as the "Wash Sale" rule. In essence, if you sell an item for a loss and then buy it or a "substantially identical" item back within 30 days (before or after the sale), you can't immediately claim your loss. Instead, the loss adjusts your basis price and holding date on your new purchase.
Despite all that complexity, capital gains tax rates in 2014 generally remain lower than ordinary income taxes, especially for assets that you've held for more than a year. Managed well over an entire investing lifetime, your portfolio can give you plenty of opportunity to leverage those lower rates to help your money go further in your golden years.
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