Capital gains tax in the United States

In the United States of America, individuals and corporations pay U.S. federal income tax on the net total of all their capital gains. The tax rate depends on both the investor's tax bracket and the amount of time the investment was held. Short-term capital gains are taxed at the investor's ordinary income tax rate and are defined as investments held for a year or less before being sold. Long-term capital gains, on dispositions of assets held for more than one year, are taxed at a lower rate.

As of 2016, the United States taxes short-term capital gains at the same rate as it taxes ordinary income. Long-term capital gains are taxed at generally lower rates, shown in color in the table below:

The dollar amounts ("tax brackets") are adjusted each year based on inflation, and are after deductions and exemptions, which means that there is another bracket, of income below that shown as $0 in the table, on which no tax is due.

There may be taxes in addition to the tax rates shown in the above table.

However, capital gains do not push ordinary income into a higher income bracket. The Capital Gains and Qualified Dividends Worksheet in the Form 1040 instructions puts both of these types of income into a tax bracket as though they were the last income received, then applies the lower capital gains tax rate as shown in the above table.

The capital gain that is taxed is the excess of the sale price over the cost basis of the asset. The taxpayer reduces the sale price and increases the cost basis (reducing the capital gain on which tax is due) to reflect transaction costs such as brokerage fees, certain legal fees, and the transaction tax on sales.

In contrast, when a business is entitled to a depreciation deduction on an asset used in the business (such as for each year's wear on a piece of machinery), it reduces the cost basis of that asset by that amount, potentially to zero. The reduction in basis occurs whether or not the business claims the depreciation.

If the business then sells the asset for a gain (that is, for more than its adjusted cost basis), this part of the gain is called depreciation recapture. When selling certain real estate, it may be treated as capital gain. When selling equipment, however, depreciation recapture is generally taxed as ordinary income, not capital gain. Further, when selling some kinds of assets, none of the gain qualifies as capital gain.

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