Question about Capital Gains Tax Rate
- Thread starter trader99
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Thanks for the link! However, it's about long term capital gains. Still doesn't my original question on short term capital gains being higher than your ordinary income tax, is it still taxed at the ordinary income tax bracket...
Short-term CG is taxed as ordinary income.
If you make 50K from W2 employment and have 100K of short-term CG
You have 150K of ordinary income.
To be clear, but simplistic... the IRS (usually) considers ordinary income as any income OTHER THAN LONG-TERM capital gains.
Visit a CPA, preferably not a moonlighting plumber at H&R Block for further details or advise for your actual numbers, circumstances, and location.
If all you’ve got is wages and STCGs, you’re going to pay ordinary on everything, plus maybe NIIT/Obamacare tax if you do well enough on the short term gain portion. The preferential rates are only for long term gains.
I get it but I don't think you do. Your total income, including all capital gains long term or short, is used to determine which long term capital gains tax bracket your long term gains are taxed at. Your short term gains are simply taxed as ordinary income, so that part is easy. So if your income is $15K and your short term gains are $30K and your long term gains are $100K, the "Your Income" column in the article you linked to would be 15+30+100=$145K and your long term capital gains tax rate would be 15% on the entire amount of your long term gains. I believe you may be trying to not include the $100K in the "Your income" column, which is the cause for the confusion.No, I was thinking of short-term capital gains since I mostly daytrade. Supposed your job salary is $X but your short-term capital gains is 2X (or whatever amount that would push you into a higher income tax bracket) then shouldn't your capital gains tax rate be the same as $X your original tax bracket right?
Because short-term capital gains are taxed at the ordinary income tax bracket. Get what I'm trying to say?
Also keep in mind that the long term gains rate is always less than the ordinary income rate for that income level. In the above example, every marginal dollar over your $45K ordinary income would be taxed at 22% if it was more ordinary income or short term capital gains. Instead you're getting a lower rate of 15%. Some of your comments seem to indicate that you might think that long term gains rates could be higher in some circumstances, but this would never be the case if you compare the two schedules side by side.
This is a good article on how ordinary income and long term gains interact, including lots of examples.
https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/
Basically you should think of the LTCGs as “on top of” your ordinary and other income, and they get the better marginal tax brackets according to that starting point. Do note that your LTCGs can push your total income over say the 0% or 15% LTCG cutoffs, in which case some would be taxed at the lower rate and the rest would be taxed at the higher rate.
https://www.kitces.com/blog/underst...st-capital-gains-for-a-free-step-up-in-basis/
Basically you should think of the LTCGs as “on top of” your ordinary and other income, and they get the better marginal tax brackets according to that starting point. Do note that your LTCGs can push your total income over say the 0% or 15% LTCG cutoffs, in which case some would be taxed at the lower rate and the rest would be taxed at the higher rate.
I actually thought about saying something along the lines of "Calculate the combination that gives you the highest tax number and that will be your tax amount" but thought a more detailed explanation would be more helpful
And now you can see the value of the tax-advantages of futures, and other section 1256 instruments 60/40 tax treatment. 60% LTCG, 40% STCG, regardless of holding period.
And although not appropriate for a one-off 100K situation, the value of qualifying for TTS (trader tax status), and financially engineering capital gains into earned income, and a host of deductions and possible further tax-advantaged distributions.
Good trading to you.