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I'm afraid I'm missing something because the 0% tax bracket for capital gains seems too good to be true.

Everything I'm reading (e.g. "The zero percent tax rate on capital gains applies to people in the 15 percent marginal tax rate or below. In 2018, that applies to married tax filers with taxable income up to $78,750, and single tax filers with taxable income up to $39,375." at thebalance.com) says that my capital gains tax rate is dependent only my income tax bracket.

In other words, say I have $2 Million worth of a mutual fund, which I bought more than a year ago for $1 Million (i.e. long-term capital gains of $1 Million). If my income this year is $40,000 and I sell all holdings in this fund, I will pay $150k of capital gains tax. However, if my income is $38,000 and I sell it all, I pay nothing.

Is this correct? If not, what am I missing?

marked as duplicate by JoeTaxpayer Jun 20 at 19:41

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No this is not how it works. Let's say you have long term capital gain of $1M and a regular income of $38k. So your total income is $1038k

  1. You pay regular income tax on the first $38,000,
  2. You pay nothing on the amount between $38,000 to $39376
  3. You pay 15% on the amount between $39376 and $434,550
  4. You pay 20% on the amount between $434,550 and $1,038,000

Total long term tax would be $173,126

  • Thanks, that makes a lot more sense! I'm not doubting you because the scenario I laid out is truly too good to be true, but do you have a source for that? Everything I read says that the capital gains rates are based on your taxable income (and unless I'm wrong, capital gains is not considered income, is it?) – Jer Jun 20 at 20:13
  • Most online sources just explains the "simplified" version assuming that your compensation income is much larger than you capital gains. The IRS stuff is super hard to read. If you want independent confirmation just poke a few numbers into Turbo Tax or some other tax program – Hilmar Jun 20 at 20:38
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    @Jer: No, long-term capital gains are considered income, but income that is taxed at a different rate than ordinary income. There's a fairly complicated worksheet in the Form 1040 instructions that's used to compute the actual tax. There are also a lot of on-line calculators out there. – jamesqf Jun 21 at 3:05
  • @jamesqf: I would be cautious with online calculator since most of them actual do a a simplified calculation which would get the above scenario VERY wrong. – Hilmar Jun 21 at 15:15
  • @Hilmar: I wouldn't know about that. But then, I hardly ever get things right using the official IRS worksheet :-( Luckily, I always seem to err on the side of over-paying, so they just send me a notice and a check. – jamesqf Jun 21 at 16:00

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