As has been answered on many questions, people pay 0% capital gains if their taxable income is below $40,000, 15% capital gains tax if between $40,000 and $441,450 and 20% if over $441,450. My question is, like regular income tax, are these taxes progressive?

For example, say I make a salary of $32,500 per year. I take the standard deduction of $12,500. So my taxable earned income is $20,000. Now let's say I sell some stocks I've been holding for 10 years, for a capital gain of $40,000. So is my capital gains tax 15% of $40,000 (since my combined taxable income, 60,000, is over 40,000) or do I pay 15% of $20,00 (I pay 0% on the first 20,000 of capital gains income until I hit $40,000 total income, then pay 15% on the remainder above $40,000)?

In other words, is capital gains tax progressive in the USA (just like regular income tax)? Assume I am talking only about federal tax. I shockingly can't find this info on the IRS website.

  • As far as I know, the combined income sets a fixed tax rate. All your capital gains are taxed at the same rate determined in part by your income.
    – chepner
    Nov 3 '21 at 13:53
  • 1
    @chepner That's what I initially thought, but this totally unofficial source suggests the opposite, nerdwallet.com/article/taxes/capital-gains-tax-rates, but I don't know if I can trust it, as I have found no official source for this and no other unnoficial corroborating sorce. Nov 3 '21 at 14:05
  • Those breakpoints were for 2020 if filing as single; they were different for other statuses, were different in prior years (for all statuses), are different this year (see rp-20-45 in 2020-46 IRB item .03), and different again next year. But the fact of progressivity will remain, unless there are major changes in the law (which has happened in the past, and could happen again). Nov 5 '21 at 3:07

I recommend you work out the Schedule D worksheet (page 16 and 17 at this IRS instruction PDF)

Short answer: 20,000 is taxed at 0%

Your total taxable income after standard deduction and including the gross capital gains goes in box 1:(32,500+40,000-12,500) = 60,000.

Your total long term capital gains from Schedule D goes in box 7: 40,000.

Your example is not stipulated to have variables such as dividends, the 28% and section 1250 recapture, investment interest, and other modifications that impact these values, so the value in 7 should flow to box 9, 10 and 13: 40,000

  1. Box 14 subtracts box 13 from box 1. So your example box 14: 1:60000-13:40000 = 20,000

  2. Box 15 is where you put your limit, stipulated as 40,000 for single.

  3. Box 16: smaller of 1:60000 or 15:40000 = 40000

  4. Box 17: smaller of 14:20000 or 16:40000 = 20000

  5. Box 18: 1:60000 - 10:40000 = 20000

  6. Box 19: 163,300 for Single

  7. Box 20: smaller of 14:20000 or 19:163,300 = 20000

  8. Box 21: larger of 18:20000 or 20:20000 = 20000

Line 22: Key line in the instructions:

Subtract line 17 from line 16. This amount is taxed at 0%

  1. 16:40000 - 17:20000 = 20,000

20,000 is taxed at 0%

The value in line 21 is crossreferenced to a tax table to calculate the tax due in line 44. Any of the special recapture values get reintroduced between line 21 and 44.

  • Note that link is still the 2020 form; the 2021 version is not yet released and will have changes in the breakpoints but the overall method (using brackets) will remain the same. Nov 5 '21 at 3:09

Yes, you can have portions of your long-term capital gains taxed at different rates if adding your long-term capital gains to your other taxable income causes your total income to span multiple capital gains tax brackets.

In your example (assuming you file single) you'd pay 0% on the first $20,400 ($20,000 in 2020) of long-term capital gains and 15% on the remainder.

Just to clarify, a progressive tax just means the more you earn/make the higher the rate you pay. By virtue of having tiers with higher rates for higher incomes it is progressive. It would be a progressive tax regardless of whether or not all of your capital gains were subjected to the higher rate.

In addition to having a progressive tax system, the US system also (in general) does not discourage you from making more money. The tax rates in each bracket only apply to the dollars in that bracket. This avoids creating situations where you'd be better off earning/making less. There are/have been edge-cases with certain tax-credits where this doesn't hold, but in most cases tax credits will have income phase-outs to avoid this.


Is US capital gains tax progressive?

The astonishing answer is "not really". As with most taxes the long term capital gains tax is needlessly complicated and the convoluted way it's calculated and interacts with deductions and phaseouts creates unintended side effects.

For a given mix of regular and long term income, you can find cases where the effective tax rate actually decreases as the income increases. While this is rare, it can happen. So a mix of regular income and and long term gains is not strictly taxed progressively.

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