Does Capital Gains Tax apply to all gains, or only those over the income threshold for that rate?

Submitted by TheyReadALot t3_1002g4a in personalfinance

Does the capital gains tax rate work like income tax - you pay a given rate for all income within each rate threshold - OR is it the case that as soon as your income crosses the earning threshold, you pay capital gains taxes on all of your capital gains (even those below the income threshold for that rate)?

Here's an example to clarify:

In 2022, the capital gains tax rate is 0% until a single filer earns $41,676 at which point is shifts to a 15% capital gains tax rate. Let's say I earn $40,000, and I have capital gains of $2,000. Would I have to pay the 15% capital gains tax on all $2000 of my capital gains, or would I pay 0% on $1,676 of my capital gains, and only pay 15% on the $324 in capital gains that pushes me over the $41676 income threshold?

I have searched for ages to find an answer to this but am stumped. Online calculators differ in how they calculate it and I can't find any solid guidance. Thanks!

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pancak3d t1_j2f3612 wrote

Works exactly the same as income tax brackets. 0% on first 1676, then 15%.

You didn't account for standard deduction here but just overlooking that for simplicity

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TheyReadALot OP t1_j2f5p14 wrote

Thanks so much!

To clarify, is it the case that when calculating your total taxable income for capital gains tax rate calculations, you should do so *after* removing the standard deduction from your income?

To continue the example, if my income was $40,000 and the standard deduction is $12,950, I wouldn't actually pay any capital gains taxes until I earned >$14,626 in capital gains (which would make my income $54,626 - minus the deduction of 12,950 =$41,676 the capital gains income threshold).

Thank you again for your help!

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pancak3d t1_j2f6603 wrote

Correct. The standard deduction reduces your taxable income.

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TheyReadALot OP t1_j2f6y6d wrote

Woo hoo! This makes things much less stressful as I'm trying to figure out our tax situation and adds SO much clarity. Thanks so much for your help.

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BouncyEgg t1_j2f31vr wrote

Play around with a capital gains tax calculator.

It will help solidify your understanding:

> I pay 0% on $1,676 of my capital gains, and only pay 15% on the $324 in capital gains that pushes me over the $41676 income threshold?

This is the correct version.

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TheyReadALot OP t1_j2f3wnb wrote

Perfect. Thank you! I'd tried a few different cap gains calculators, and some produced estimates in the first model and some with the second - very helpful to get this clarification.

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