How Capital Gains Are Taxed and How That Might Change

Capital gains taxes are the price of making a good investment. They’re levied on profitable stock trades and real estate deals and also can apply to sales of businesses, pieces of art, collectible cars, gold and other assets. With President Joe Biden and fellow Democrats in the U.S. Congress looking for ways to fund increased social spending, raising the capital gains rate for wealthy taxpayers is a front-burner idea, though how far to raise it remains an issue.

Investors are taxed on the difference between what they paid for an asset and what they sold it for. The U.S. federal rate for investments held at least one year currently tops out at 20%, well below the top marginal rate of 37% on wages and salaries. (Investments held for a year or shorter are taxed the same as wages and salaries.) As with all investments, an additional 3.8% tax applies to capital gains earned by individuals earning at least $200,000, or married couples earning $250,000, to fund the U.S. health-insurance subsidy program known as Obamacare. And a higher 28% capital gains rate applies to transactions involving certain investments in small businesses and in collectibles such as art, antiques, stamps, wine and precious metals. States also tax capital gains but have varying approaches.