When it comes to capital gains taxes, one of the most common questions is how much capital gains can be earned tax-free each year. The answer depends on your tax filing status and income level. Here’s a quick overview of the capital gains tax rates and tax-free thresholds for 2023.
What are capital gains?
Capital gains refer to the profit earned when you sell an asset, like stocks, bonds, mutual funds, or real estate, for more than you paid for it. Any profit counts as a capital gain and is subject to capital gains tax unless your gains fall below the tax-free thresholds.
What are the capital gains tax rates for 2023?
The capital gains tax rates for 2023 are:
- 0% for individuals in the 10% and 12% ordinary income tax brackets
- 15% for individuals in higher ordinary income tax brackets
- 20% for individuals in the top (37%) ordinary income tax bracket
So your capital gains tax rate depends on your ordinary income level. The brackets are adjusted annually for inflation.
What are the tax-free capital gains thresholds for 2023?
Here are the tax-free capital gains thresholds for 2023:
| Filing Status | Tax-Free Threshold |
|---|---|
| Single | $44,625 |
| Married filing jointly | $89,250 |
| Head of household | $55,800 |
| Married filing separately | $44,625 |
So if you’re single and earn capital gains of $40,000 in 2023, your gains fall under the tax-free threshold so you would owe no capital gains tax. The thresholds are adjusted annually for inflation.
What types of assets have special capital gains rules?
Certain assets like primary residences, collectibles, and small business stock have special capital gains rules:
Primary residences
For primary residences, up to $250,000 of capital gains from a home sale is tax-free for single filers and up to $500,000 is tax-free for married joint filers, if certain conditions are met.
Collectibles
Gains on collectibles like artwork, antiques, coins, and stamps are taxed at a higher 28% capital gains rate.
Small business stock
Gains on the sale of qualified small business stock held for more than 5 years may be tax-free up to certain limits.
Are capital gains considered income?
Yes, capital gains are considered part of your income for tax purposes. Short-term capital gains on assets held 1 year or less are taxed at your ordinary income tax rate. Long-term capital gains on assets held longer than 1 year qualify for the preferential capital gains tax rates.
Can capital losses offset capital gains?
Yes, you can use capital losses to offset capital gains, thereby reducing your overall capital gains tax liability. If your capital losses exceed your capital gains, you can deduct the excess loss up to $3,000 per year against ordinary income.
What are some tips to reduce capital gains taxes?
Here are some tips to reduce your capital gains tax burden:
- Hold assets for over 1 year to qualify for long-term capital gains rates
- Harvest losses by selling assets trading below your basis to offset capital gains
- Donate appreciated assets to charity to avoid capital gains tax
- Sell assets in years your income falls below the 0% capital gains tax threshold
- Use capital losses to offset up to $3,000 of ordinary income per year
Conclusion
In 2023, single filers can realize up to $44,625 in capital gains tax-free, while married joint filers can earn up to $89,250 tax-free. Capital gains tax rates are 0%, 15%, or 20% depending on your ordinary income tax bracket. With proper tax planning, you can minimize the taxes owed on your capital gains.