Capital Gains Tax Rate

The advantage of capital gains, as opposed to ordinary income, is that the maximum tax rate on capital gains for most types of property held for more than one year by most taxpayers is 15 percent. (In contrast, the top ordinary income tax rates are all higher than this, with the top rate through 2013 at 39.6 percent.)

For tax years ending on or after May 6, 2007, and through the end of 2012, up to four different rates could apply to long-term capital gains:

• 15 percent, for most taxpayers and most types of property
• Zero percent for taxpayers in the 10 percent or 15 percent tax brackets
• 28 percent for collectible gain
• 25 percent for unrecaptured gain from the sale of certain depreciable realty (Section 1250 property)

For tax years beginning in 2013, the capital gains of higher-income taxpayers are taxed at a higher rate. Thus, after 2012, the capital gains rates are

• 20 percent for taxpayers that fall into the newly created 39.6 percent tax bracket (unless the property itself is subject to a special rate)
• 15 percent, for taxpayers in the 25 percent, 28 percent, 33 percent and 35 percent tax brackets (unless the property itself is subject to a special tax rate)
• Zero percent for taxpayers in the 10 percent or 15 percent tax brackets
• 28 percent for collectible gain
• 25 percent for unrecaptured gain from the sale of certain depreciable realty (Section 1250 property)

Special rates for specific property. As noted above, the long-term capital gains rate on business or investment real estate (called "section 1250 property" on the tax forms) is 25 percent up to the amount of depreciation on the property while you owned it. However, there are no losses counted in the 25 percent rate group and any loss from this group must be taken into account in computing net gain or loss in the 15 percent rate group. Also, the long-term capital gains rate on collectibles such as art, rugs, jewelry, precious metals or gemstones, stamps or coins, fine wines, or antiques is 28 percent.

Warning High-income taxpayers with net investment income may also find themselves subject to the 3.8 percent Medicare tax beginning in 2013. (Higher income for this purpose means modified adjusted gross income over $200,000 for an unmarried taxpayer and $250,000 for married taxpayers that file joint returns.) This new tax means that those taxpayers hit with this tax, the effective tax rate for capital gains will be 18.8 percent or 23.8 percent, depending on one's taxable income. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax— Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.

For small business owners, capital gains may have another advantage worth mentioning, even with the new 3.8 percent Medicare tax. Unlike the money you earn in your business, capital gains are not subject to the self-employment tax. The rates for this tax in 2013 were 15.3 percent on up to $113,700, 2.9 percent thereafter, and then 3.8 percent if the taxpayer is subject to the new 0.09 Medicare surtax. However, if a major activity of your business is buying or selling property that would be capital gains property in the hands of the average taxpayer -- for example, you're a dealer in coins or stamps, or you're a real estate developer -- you will have to treat your gains on sales as ordinary business income, reported on Schedule C rather than Schedule D. In that case, you would be subject to self-employment tax on these gains.