Ch6. Capital Gains Tax — Stocks, ETFs, Crypto, and Real Estate Sales

What Is Capital Gains Tax?

When you sell an asset for more than you paid for it, the profit is a capital gain — and it’s taxable. The tax rate depends on how long you held the asset.

Capital Gain = Amount Realized − Adjusted Basis

Amount Realized: sale price minus selling costs (commissions, closing costs)
Adjusted Basis:  original purchase price plus capital improvements

Short-Term vs. Long-Term Rates

Holding Period	Tax Rate
≤ 1 year (short-term)	Ordinary income rate (10%–37%)
> 1 year (long-term)	0%, 15%, or 20%

2024 Long-Term Capital Gains Rates (Single Filers)

Taxable Income          Rate
$0 – $47,025            0%
$47,026 – $518,900      15%
Over $518,900           20%

Key principle: holding an investment for just one day past the 1-year mark can drop your rate from 22–37% (ordinary) to 0–20% (long-term). Timing matters.

Net Investment Income Tax (NIIT)

High-income taxpayers owe an additional 3.8% NIIT on net investment income (including capital gains).

NIIT threshold (2024):
Single:         $200,000 MAGI
Married Filing Jointly: $250,000 MAGI

Example:
MAGI $300,000 (single) → $100,000 above threshold
NIIT = $100,000 × 3.8% = $3,800 (if all net investment income)

Primary Residence Exclusion (§ 121)

The biggest capital gains break available to most homeowners.

Exclusion amounts:
Single:                     $250,000
Married Filing Jointly:     $500,000

Requirements:
→ Owned the home for at least 2 of the last 5 years
→ Used it as primary residence for at least 2 of the last 5 years
→ Have not used the exclusion in the past 2 years

Example:
Bought for $300,000; sold for $650,000 (MFJ)
Gain: $350,000
Excluded: $500,000 (the gain is fully excluded → $0 tax)

Stock and ETF Taxation

Scenario: Sell 100 shares of ABC at $80 (bought at $50, held 14 months)
  Gain = ($80 − $50) × 100 = $3,000 long-term gain

At 15% long-term rate: $3,000 × 15% = $450 tax
At 22% short-term rate (if held <1 year): $3,000 × 22% = $660 tax
Difference: $210 — the cost of impatience

Wash Sale Rule

Cannot deduct a loss if you repurchase substantially identical securities
within 30 days before or after the sale.

Example:
Nov 15: Sell XYZ at a $2,000 loss
Dec 1:  Buy XYZ back
→ Loss is DISALLOWED (wash sale)
→ Disallowed loss adds to the basis of the new shares

Workaround: wait 31 days, or buy a similar (not identical) ETF immediately

Cryptocurrency Taxation

The IRS treats cryptocurrency as property, not currency. Every taxable event triggers a capital gain or loss.

Taxable crypto events:
✓ Selling crypto for USD
✓ Trading one crypto for another (e.g., BTC → ETH)
✓ Buying goods/services with crypto
✓ Receiving crypto as income (taxed as ordinary income)

Non-taxable:
✗ Buying crypto with USD
✗ Transferring crypto between your own wallets
✗ Holding

Example:
Bought 1 ETH at $1,000 (Jan 2023)
Sold 1 ETH at $3,500 (Mar 2024) — held 14 months
Long-term gain = $2,500 → taxed at 0–20% depending on income

Tax-Loss Harvesting

Strategically realize losses to offset gains and reduce taxes.

Example:
Long-term gains realized: $10,000
Loss harvested from a losing position: −$4,000
Net taxable gain: $6,000

At 15%: $6,000 × 15% = $900 (vs. $1,500 without harvesting)
Tax saved: $600

Rules:
→ Losses first offset same-type gains (short against short, long against long)
→ Remaining net loss can offset the other type
→ Up to $3,000 of net capital loss can offset ordinary income per year
→ Unused losses carry forward indefinitely

Timing:
→ Review unrealized losses in November–December
→ Harvest before year-end; reinvest to maintain market exposure (watch wash sale rule)

Carried Interest and Collectibles

Collectibles (art, coins, wine, stamps):
→ Long-term rate capped at 28% (not 15/20%)
→ Short-term taxed as ordinary income

Carried interest (investment fund managers):
→ Performance fees taxed as long-term capital gains if holding period > 3 years
→ Subject to ongoing legislative scrutiny

Practice Quiz

Q1. You bought stock for $5,000 and sold it 11 months later for$ 8,500. Your marginal income tax rate is 24%. How much is your approximate capital gains tax?

$8,500 −$ 5,000 = $3,500 short-term gain (held <1 year). Tax =$ 3,500 × 24% = ** $840**. Had you waited one more month, the long-term rate (likely 15%) would have reduced the bill to$ 525 — saving $315.

Q2. A married couple bought their home for $400,000 and sold it for$ 950,000 after living there for 3 years. How much is taxable?

Gain = $550,000. The § 121 exclusion for MFJ is$ 500,000.
Taxable gain = $550,000 −$ 500,000 = $50,000.

Q3. You sold Stock A at a $6,000 long-term gain and Stock B at a$ 2,500 long-term loss. What is your net taxable long-term gain?

$6,000 −$ 2,500 = $3,500 net long-term gain.