When it comes to long-term capital gains taxes, many taxpayers assume there are only two rates: 15 and 20 percent. However, the IRS has another largely forgotten rate that allows you to pay nothing for your investment gains. Yes, there is a 0 percent tax bracket for capital gains. And perhaps even more surprising, many Americans easily qualify for it.
Here you can read how you can (legally) avoid paying tax on your capital gains and what you should pay attention to.
The not-so-secret capital gains tax rate of 0 percent
Although it can be easy to overlook, the IRS has clearly laid out how to qualify for a 0 percent capital gains tax rate, and for most Americans, this isn’t that difficult to achieve. With increases in 2023 and 2024 to the standard deduction and tax brackets due to inflation, qualifying is easier than ever.
You have two important conditions:
- Your capital gains must be long term
- Your taxable income must be below a certain level, depending on your filing status
Let’s see what these terms mean in practical terms.
First, your capital gains should be long-term rather than short-term. A capital gain becomes long-term when you have owned the asset for at least a year. If you don’t hold it that long, you’ll pay taxes at the short-term capital gains rate, which is exactly the rate for ordinary income.
Second, your taxable income – defined as adjusted gross income minus your deductions, standard or itemized – must be less than a certain threshold for long-term capital gains tax rates for your filing status, such as an individual or married filing jointly.
The tables below show the taxable income thresholds to meet the long-term capital gains tax rates of 0, 15 and 20 percent.
Long-term capital gains tax rates for the 2023 tax year
| SUBMISSION STATUS | 0% RATE | 15% RATE | 20% RATE |
|---|---|---|---|
| Source: Domestic Tax Authorities | |||
| Single | Up to $44,625 | $44,626 – $492,300 | More than $492,300 |
| Married filing jointly | Up to $89,250 | $89,251 – $553,850 | More than $553,850 |
| Married filing separately | Up to $44,625 | $44,626 – $276,900 | More than $276,900 |
| Head of household | Up to $59,750 | $59,751 – $523,050 | Over $523,050 |
Long-term capital gains tax rates for the 2024 tax year
| SUBMISSION STATUS | 0% RATE | 15% RATE | 20% RATE |
|---|---|---|---|
| Source: Domestic Tax Authorities | |||
| Single | Up to $47,025 | $47,026 – $518,900 | More than $518,900 |
| Married filing jointly | Up to $94,050 | $94,051 – $583,750 | More than $583,750 |
| Married filing separately | Up to $47,025 | $47,026 – $291,850 | More than $291,850 |
| Head of household | Up to $63,000 | $63,001 – $551,350 | More than $551,350 |
For example, if you file a tax return as an individual, you can earn taxable income of up to $44,625 in 2023 and qualify for the 0 percent rate. For 2024, that threshold for individuals will increase to $47,025. Those with married filing jointly status will receive double these amounts, while married filing separately and head of household each have their own tiers.
Earn up to this level of taxable income and you’ll benefit from that 0 percent rate on long-term gains. In fact, taking advantage of this special 0 percent rate is an important part of how you and your family can earn a six-figure income without having to pay any income tax on it at all.
To benefit from this low rate, you must know your financial situation well.
What to look out for with the 0 percent capital gains tax rate
These rules for claiming the 0 percent rate seem simple enough, but taxpayers should be especially careful if they attempt to do so. Here are some important issues to be aware of:
- Stay below the income limit. If you exceed the income threshold for the 0 percent rate, you will be bumped into the 15 percent bracket and will have to pay tax on any gains above the threshold at that higher rate or the even higher 20 percent rate – a costly mistake .
- It concerns the total taxable income, not your salary. You may think you don’t qualify for the 0 percent rate because your reported salary is above the taxable income level. But the most important level is total taxable income, which is adjusted gross income minus deductions. So you can contribute to a retirement account — say, a 401(k) or IRA — and reduce your taxable income, make other adjustments, and then take your deductions before arriving at taxable income. For example, a married couple can earn more than $100,000 in salary and still qualify once deductions and adjustments are taken into account.
- Take advantage of tax loss harvesting. To ensure you don’t exceed the income threshold, it can be valuable to realize any capital losses near the end of the year through tax loss harvesting. Capital losses can offset capital gains, and you can deduct a net $3,000 in losses each year, keeping your adjusted gross income in a good place. Tax-loss harvesting is a useful last-minute strategy, but be sure to avoid wash sales.
- Year-end distributions from mutual funds can derail your plans. Mutual funds distribute capital gains and other cash at the end of the year, so this could play a key last-minute role in your plans to claim a 0 percent tax rate, if you own one. That’s one of the many reasons why ETFs can be a better choice than mutual funds.
If you follow the capital gains rules you will be fine, but if you do run afoul of them you could end up paying a lot more than you expected.
In short
Most American households can benefit from a 0 percent capital gains tax on their investments, but it’s important to follow the rules carefully or you could end up paying more than you expect. Still, it can be well worth your time and energy to understand the rules of the game so that you can take legal advantage of all the ways to build your wealth.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
