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Let's say I don't have ordinary income, so I'm at the 10% tax bracket. If all of my income is from capital gains, how much of it do I pay in taxes?

My understanding is that if I'm in the 10% tax bracket, I pay 10% in short-term capital gains and 0% in long-term capital gains. Does that mean that if I have millions of dollars invested and the proceeds give me hundreds of thousands of dollars in income each year, the most I would pay in taxes on that would be 10%?

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  • Let's say I don't have ordinary income, so I'm at the 10% tax bracket. - how are two claims related? Why not having ordinary income puts you in the 10% bracket? I'm guessing your country has some very specific and exceptional law on the issue?
    – littleadv
    Commented Jan 9, 2015 at 23:08
  • @littleadv These are the tax brackets in the United States: bankrate.com/finance/taxes/tax-brackets.aspx
    – user19035
    Commented Jan 9, 2015 at 23:11
  • Don't forget about the "Alternative Minimum Tax" that may apply here too.
    – JB King
    Commented Jan 9, 2015 at 23:44
  • One way to answer questions like these if you use tax prep software (TurboTax etc), is to create a new return and put in your hypothetical numbers. That should take into account all of the factors, and let you see exactly how different scenarios affect the total tax bill.
    – KeithB
    Commented Jan 10, 2015 at 16:12

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I found the answer. I had a small misconception about capital gains taxes. It so happens that your ordinary income tax bracket is calculated by adding your capital gains to your ordinary income. So in the example I gave in the question, those hundreds of thousands of dollars of capital gains income would put you in a high tax bracket, so you would have to pay capital gains taxes based off that tax bracket (probably 20% for long term and 39% for short term in the worst case scenario).

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  • This is called "AGI" - adjusted gross income. It affects many things, not just the rate brackets. For example, some deductions phase out at certain AGI levels, AMT is affected, etc etc.
    – littleadv
    Commented Jan 9, 2015 at 23:55
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    That's not really true. Capital gains are added into AGI, and thereby Gross Income and Taxable Income. But the tax computation separates out longterm cap gain (net of shortterm cap loss), and also qualified dividends, and applies preferential rates to them, and ordinary rates and brackets only to other taxable income. In the 2014 general instructions see line 44 on page 41, page 43, and in more complex cases the Schedule D instructions at pages D-15 and D-16.
    – dave_thompson_085
    Commented Jan 17, 2015 at 0:52
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    Also if your income was all (or mostly) non-payroll without withholding, and you didn't estimate your taxes well enough to make at least nearly correct estimated payments throughout last year, you are likely to owe a significant penalty, unless an exception applies. See form 2210 and instructions. Or as noted use one of the popular software packages, they figure this automatically.
    – dave_thompson_085
    Commented Jan 17, 2015 at 0:58
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I believe that this thread provides a better answer: How are long-term capital gains taxed if the gain pushes income into a new tax bracket?

Your answer misses the point that your capital gains would be taxed at zero percent up to about $40k (I believe this equates to everything that falls into the 10% and 12% tax brackets). After that, your long-term cap gains income would be taxed at capital gains rates rather than ordinary income rates.

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  • If the capital gains are short-term (tax lot is less than a year old) then you pay normal income tax rates.
    – Nosjack
    Commented Nov 24, 2020 at 13:55

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