A Tax Fact from The Tax Institute at H&R Block

Is it true?
Yes, it’s true! In 2008 a zero percent capital gain rate made its first appearance, but that does not mean all capital gain will be taxed at zero percent. Notice I said that there is a zero percent rate; I did not say that the capital gain rate is zero!

What’s the difference?
For most sales of capital assets (stocks, bonds, mutual funds, etc.) there are two long-term capital gain rates that apply. “Long-term” means that the stock or other property must have been held more than one year before being sold. Since May 6, 2003, those rates have been 5% and 15%.

Why are there two rates?
The idea is that long-term capital gain rates are more favorable than ordinary rates—the rates that apply to wages, self-employment income, alimony, and other types of ordinary income.

Currently, the ordinary rates range from 10% to 35%. So, if someone is in one of the higher brackets (25%-35%), a 15% rate that is applied to capital gain is certainly a tax benefit.

But if someone is in the 10% or 15% bracket, a 15% capital gain rate would clearly not be very helpful. So, a lower capital gain rate is available to the extent a taxpayer is in one of the lower brackets.

And in 2008, that lower capital gain rate changed from 5% to 0%.

So the 0% rate applies to the extent an individual is in one of the lower brackets. What exactly does “to the extent” mean?
Essentially, it means that if all taxable income (ordinary income plus capital gain income) is not more than the 15% bracket cut-off amount for an individual’s filing status, then long-term capital gain will be taxed at 0%.

An individual may have any amount of ordinary and capital gain income. Depending on the combination of ordinary income and long-term capital gain an individual has, filing status, and other factors, it could be that only the 0% rate applies, only the 15% rate applies, or both rates may apply to the individual’s long-term capital gain.

Anything else?
Yes. Short-term capital gain rates (for sales of assets held one year or less) are the same as ordinary income rates. For sales of collectible items the capital gain rate is 28%. And for some depreciable assets (rental property, for example), a 25% rate may apply to some of the gain.

This Tax Fact is brought to you by The Tax Institute at H&R Block.

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As always...everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.