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I've found many sites that list the current U.S. long-term capital gains (LTCG) tax rates for tax year 2021. But I can't find any explanation whether these tax rates are marginal or effective.

For example, for a single filer, the 2021 LTCG tax rate is 0% for incomes up to $40,400 and 15% for incomes from $40,401 to $445,850. Suppose that in 2021 you made $30,000 in ordinary income and $10,401 in LTCG, so that your total taxable income is $40,401 and you just cross into the 15% LTCG tax bracket. Do you owe $1,560.15 (15% * $10,401) in LTCG taxes, or do you only owe $0.15 in LTCG taxes since you only need to pay taxes on the last marginal dollar that pushed you into that tax bracket?

From what I can gather, the LTCG rates appear to be effective - I don't see them described as marginal anywhere, nor can I find any formulas for calculating effective LTCG rates that incorporate lower marginal rates for lower brackets (as I've found for ordinary income tax rates).

But if the rates are effective then that seems a little weird, because that means that making additional capital gains can push you into a higher bracket and actually lower your after-tax income. The marginal tax rate on the marginal income that just pushes you into the higher bracket is technically infinite, since an infinitesimal increase in income leads to a non-infinitesimal increase in your total tax rate. An infinite marginal tax rate that kicks in at certain income levels seems like an odd feature of a tax system. (I guess that since the U.S. tax code discretizes income into integer numbers of dollars, the marginal rate isn't actually infinite, but it can still be very high. For instance, in my example above, your 40,401st dollar of income would increase your LTCG tax by $1560.15, for a marginal LTCG tax rate of 156,015% just on that single dollar of income.)

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  • You can't find a formula because "it depends." There is a big difference in taxes between $100k wage income $10k capital gains vs. 0 wage $110k cap gains. You have to come up with a scenario and then run it through Schedule D.
    – stannius
    Apr 5 at 19:27
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    Both ordinary and LTCG/qual-div tax brackets are marginal, and both apply after deductions: with 30000 ordinary income and 10401 LTCG and the standard deduction of 12550 for single in 2021, you would have taxable income of 30000+10401-12550=27851. To have the situation described with taxable income 40401 just reaching the 15% LTCGQD bracket, you would need 42550 ordinary income. If you have a different filing status and/or have sufficient itemized deductions to take them instead, numbers are different. Dupe money.stackexchange.com/questions/28968 Apr 6 at 6:04

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It's marginal. LTCGs are not added to your taxable income for income tax purposes, but if adding on your LTCG puts you in another bracket for capital gains tax purposes, then the portion that's over the threshold is taxed at the higher rate.

So in your example, $10,400 of your LTCG would be taxed at 0 (since it gets you to the $40,400 threshold), and the remaining $1 would be taxed at 15%.

Also note that your "taxable income" is still just $30,000 when calculating income tax, otherwise you'd be double-taxed on capital gains.

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    Yes and no. Line 15 for 'taxable income' includes both, but the income to which 'ordinary' rates and brackets are applied is (for most cases) line 5 on the Qual Div and Cap Gains Tax Worksheet which subtracts out the LTCG/QD amounts. Apr 6 at 6:02

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