Selling an asset for a profit will likely generate a capital gains tax liability.
Capital gains are often associated with investments such as stocks or real estate, but they also apply to your primary residence, as well as a wide range of alternative assets such as collectibles, fine art, cryptocurrencies, and precious metals.
Capital gains taxes always are due the year in which the asset was divested. This article looks at whether capital gains can be carried forward and dealt with in subsequent years.
Capital Gains Tax Rates for 2022
If you had money invested in public equities markets in 2021, you likely fared well.
Although public markets are firmly entrenched in bear territory in 2022, they were bullish throughout most of 2021. The Dow Jones Industrial Average ended 2021 up 18.7 percent, the Nasdaq Composite rose 21.4 percent, and the S&P 500 was up just under 27 percent and recorded 70 all-time highs during the year.1
Investors who sold stock – or any other investment asset – for profit this year are facing a capital gains tax liability when they file their 2022 tax returns. What you owe depends on how long you held the asset, since long-term and short-term capital gains are taxed differently.
Short-term gains are generated from any assets sold for a profit that were held for less than one year. Short-term capital gains are taxed as ordinary income, so you’ll pay 10, 12, 22, 24, 32, 35, or 37 percent depending on your filing status and gross adjusted income.2
Long-term capital gains are generated on assets sold for a profit that were held for more than 12 months. Long-term capital gains tax rates are either 0, 15, or 20 percent depending on your filing status and gross adjusted income.
Capital Losses and Carrying Capital Losses and Capital Gains Forward
Capital losses are on the other side of the spectrum. Anytime you divest an investment asset for a lower price than its original basis you’ll incur a capital loss.
Capital losses can be used to offset capital gains – both are reported on Form 8949 Sales and other Dispositions of Capital Assets. This form is used to record the sale date of a capital asset, holding time, cost basis, and your capital loss or gain. If you have net losses greater than $3,000 in a tax year, you can carry those losses forward to subsequent tax years to offset any capital gains realized in future years or to reduce your ordinary income.
Capital losses up to $3,000 can be carried forward indefinitely until the amount of loss is exhausted.3 Any losses denoted on your Form 8949 will flow through to your Schedule D of Form 1040.
Capital gains, however, cannot be carried forward. They must be dealt with in the tax year in which the capital gain was realized.
Here are a few examples of capital gains and losses:
- In September a collector sold Action Comic No. 1, which introduced the world to Superman, for a record $3.4 million. The coveted comic was purchased for $3.2 million just a few months earlier. The collector generated a short-term capital gain of $200,000, which will be added to his ordinary income on his 2022 tax return.4
- An investor purchased 10,000 shares of a FANG stock in October of 2020 for $61 a share. She divested half her shares in October of 2022 when the stock traded at $152 per share, generating a long-term capital gain of $455,000 ($152-$61 x 5,000). That amount of profit likely places this investor in the highest capital gains tax bracket for 2022 ($459,751 or more for single filers, $517,201 or more for married filers).5
- An investor purchased 100 shares of an electric car manufacturer at the start of 2021 when the company was trading at $239 per share. The investor dumped his shares in October of this year after the stock had dipped to $205 per share, generating a capital loss of $3,400. He can claim up to $3,000 in capital losses for 2022 to offset any capital gains realized this year, and carry forward an additional $400 for next year.
Putting it all Together
Capital losses can be carried into future years until the loss is exhausted – there is no cap. The loss of up to $3,000 each year can be used to offset any capital gains realized in future years or to lower your income.
Capital gains, however, must be fully dealt with in the tax year in which the gain was realized. There is no provision for rolling capital gains forward.
1 2021 Stock Market Year in Review, Forbes Advisor, https://www.forbes.com/advisor/investing/stock-market-year-in-review-2021/
2 2022 Tax Brackets, Tax Foundation, https://taxfoundation.org/2022-tax-brackets/
3 Capital Loss Carryover, HR Block, https://www.hrblock.com/tax-center/income/investments/capital-loss-carryover/
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
Hypothetical examples are for illustrative purposes only.
