Capital Gains Tax vs. Net Investment Income Tax

When you sell an asset above its purchase price, you pay a tax on your gains. That's called a capital gains tax. Now, to help pay for Obamacare, higher-income earners have to pay an additional tax on income from investments, known as the net investment income tax. Read on to learn more about the capital gains tax, how big of a bite it takes out of your investments, the net investment income tax, and whether you will you be affected.

Capital gains tax
The capital gains tax is charged only on non-inventory assets, so any assets held for sale as part of the normal operation of a business aren't counted. So while you might consider a piece of jewelry an asset, a jeweler such as Zale would count the same piece as inventory and not owe capital gains on it when the item sold. For most people, non-inventory assets are stocks, bonds, property, and other similar investments.

Capital gains are taxed at two rates, depending on how long the asset was held. Short-term capital gains, which are gains on property held for less than one year, are taxed as normal income. Long-term capital gains are taxed based on the individual's tax bracket. Here are the long-term capital gains rates for 2013 and 2014.

Tax Bracket

Long-Term Capital Gains Tax Rate







Collectibles, precious metals, and depreciated assets get taxed at higher rates of 25%-28%, depending on the type of asset. Read more here.

When you sell an asset for less than you paid, you end up with a capital loss instead of a capital gain. You can offset your capital gains with capital losses all the way to zero, and you can also write off up to a total of $3,000 of capital losses each year against other earned income. Any remaining unused capital losses can be carried forward into future tax years.

Net investment income tax
Also known as the Medicare Surcharge Tax, the net investment income tax is a 3.8% tax on capital gains, as well as dividends and distributions from investments. Individuals earning over $200,000 could owe this tax. It applies to the lesser of your modified gross income above the threshold amount or your net investment income, but it doesn't include gains on the sale of a primary residence.

Source: IRS.

Say you're a single taxpayer with $50,000 in salary and $200,000 in capital gains. Your modified adjusted gross income is $250,000. So your net investment income is $200,000, but your modified adjusted gross income exceeds the threshold by $50,000, so the tax applies to the $50,000 -- the lesser of the two. You would owe the IRS an extra $1,900 ($50,000 times 3.8%).

Bottom line
Capital gains taxes and the net investment income tax both cut into your gains on profitable investments. If possible, investors should take advantage of the various types of retirement savings accounts that allow your investments to grow tax-free, such as IRAs and 401k(s).

Take advantage of this little-known tax "loophole"
For investors who must invest in taxable accounts, with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 05, 2014, at 2:25 AM, vipulhove wrote:

    Capital Gains Tax (CGT) is chargeable and due in respect of gains made from sell, transfer and otherwise disposal of assets.

    <a href=""><b>Capita... Gains Tax</b></a> can be very harsh and punishing if not planned for. That said, careful expert planning for CGT can result in significant saving of the tax and result in more of the disposal proceeds in your pocket and as less as possible of the capital gains tax.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2957617, ~/Articles/ArticleHandler.aspx, 9/3/2015 12:35:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Dzombak

Dan Dzombak has written for The Motley Fool since 2008. He covers value investing, investing process, and success among other things. You can follow him on Facebook or Twitter by clicking the buttons below or head over to his blog at

Today's Market

updated 3 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes