How does Capital Gains from stocks, shares, and crypto get taxed by the IRS?
Short-term and long-term capital gains are treated differently, as are gains and losses from one year to the next. Different tax rates apply for short-term and long-term investments.
Key factors include:
- Cost Basis: The original value of the stock.
- Sale Proceeds: The selling price.
- Dates: When the stock was acquired and sold.
The IRS distinguishes between capital gains and losses. A profit in one year can be written off against a profit in another year.
The buying and selling date is very important because they determine whether the gain is short-term (held for less than 12 months) or long-term (held for more than a year).
Capital Gains Tax (CGT) is often confusing, particularly when it involves the sale of stocks, shares, and cryptocurrencies. Let’s simplify how the IRS taxes these transactions, excluding property.
What is the difference between short-term vs. long-term gains?
The duration the stock is held will significantly affect the CGT rate:
- Short-Term: Taxed at marginal tax rates, which vary based on income and filing status.
- Long-Term: Generally taxed at a flat rate of 20%, potentially with an additional Net Investment Income Tax of 3.8%.
Imagine you bought shares at the start of the year and sold them within 12 months, making a $20,000 gain. This amount is added to your salary for short-term gains, influencing the tax bracket and rate applied. However, if that $20,000 is your sole income, the tax could be minimal, and you might be eligible for the standard deduction.
Conversely, if you earn a $60,000 salary, the $20,000 gain increases your total income to $80,000, affecting your tax rate accordingly.
What does it mean to have long-term gains?
Holding an investment for over a year shifts the tax landscape:
- Tax Rate: Typically between 15-20% on the investment profit alone.
- Additional Taxes: There is a possibility of Net Investment Income tax too, which is 3.8%.
- Strategic Selling: Timing Matters
Your tax rate can also be zero, depending on your filing status and income. Therefore, it’s crucial to consult a tax professional before selling, especially if you’re nearing the 12-month threshold. An estimated calculation might reveal significant tax savings if you wait a little longer to transition from short-term to long-term classification.
The essence of smart tax planning is clear: perform tax calculations before selling. Whether to sell now or later can have tax implications, and prior planning can guide you to a more favorable financial outcome.
Does the foreign exchange rate impact my CGT?
It’s important to note that the US dollar exchange rate can also affect your profit or loss. The exchange rate when you buy shares is almost certain to be different from when you sell, so there is an additional gain or loss on the exchange rate which is also a factor.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.