Which are taxed first long-term capital gains or short-term capital gains?

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VartAndelay
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Joined: Tue Mar 03, 2015 11:29 pm

Which are taxed first long-term capital gains or short-term capital gains?

Post by VartAndelay »

Ignore things like deductions/exemptions, net investment income tax, etc. to make the example simpler.

Example for single filer in 2020:
$100k wages
$300k long-term capital gains
$200k short-term capital gains

If long-term is taxed first:
First calculate taxes on wages
Long-term gains are then from $100k-$400k which is all $300k taxed at 15% = $45k
Snort-term gains are then from $400k-$600k which is $118.4k taxed at 35% plus $81.6k taxed at 37% = $71,632
So the total tax is:
tax on wages + $45,000 + $71,632 = tax on wages + $116,632

If short-term is taxed first:
First calculate taxes on wages
Short-term gains are then from $100k-$300k which is $63.3k taxed at 24% plus $44,050 taxed at 32% plus $92,650 taxed at 35% = $61,716
Long-term gains are then from $300k-$600k which is $141,450 taxed at 15% plus $158,550 taxed at 20% = $52,928
So the total tax is:
tax on wages + $61,716 + $52,928 = tax on wages + $114,644

Which is it?
kaneohe
Posts: 6623
Joined: Mon Sep 22, 2008 12:38 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by kaneohe »

Stack LT gains on top of your other income. The other income determines where your LT gains sit and determines the tax rates that apply to LT gains.

ST gains are taxed the same as wages so just mix them together.

see stacked bar chart by tfb 12/11/11 post viewtopic.php?t=86849

This chart was developed when there was a 15% ordinary income rate. The equivalent today is the 12% bracket so things are somewhat different but the basic concepts are the same.
Last edited by kaneohe on Tue Sep 15, 2020 9:24 pm, edited 2 times in total.
jimkinny
Posts: 1411
Joined: Sun Mar 14, 2010 1:51 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by jimkinny »

Here is a link to Motley Fool re cap gains

https://www.fool.com/investing/2019/12/ ... -2020.aspx
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by FiveK »

VartAndelay wrote: Tue Sep 15, 2020 1:51 pm tax on wages + $61,716 + $52,928 = tax on wages + $114,644

Which is it?
That one.

Doing it "for real" with the stated incomes would be $142,963 total federal income tax.
BogleTaxPro
Posts: 60
Joined: Sat Apr 04, 2020 6:08 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by BogleTaxPro »

You can see this best if you actually fill out a Qualified Dividends and Capital Gain Tax Worksheet:
https://www.thetaxbook.com/updates/TheT ... ksheet.pdf
or use your favorite tax preparation software to do "what-if" scenarios.
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dratkinson
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Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by dratkinson »

You could use excel1040.com to do what-if scenario.
--Download 2019 excel1040 to your PC.
--Enter your 2019 data to create a duplicate, known tax return baseline.
--Enter your scenario, and view tax effect.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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arcticpineapplecorp.
Posts: 6097
Joined: Tue Mar 06, 2012 9:22 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by arcticpineapplecorp. »

play around with taxcaster:

I did and came up with total tax (for 2019) of $143,787 based on the imputs you gave:

single filer
not head of household
$100k wages
$300k long-term capital gains
$200k short-term capital gains

https://turbotax.intuit.com/tax-tools/c ... taxcaster/

I know that doesn't answer your specific question, but as others have told you to do the paperwork to find out, you could play around with the numbers on taxcaster to see how adding/removing gains (lt or st) impacts the amount of tax owed.
Last edited by arcticpineapplecorp. on Tue Sep 15, 2020 8:41 pm, edited 1 time in total.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. get a plan: www.bogleheads.org/wiki/Investment_policy_statement
rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by rkhusky »

The QD & CG worksheet starts with Taxable Income from line 11b, which includes wages and all cap gains. The lesser of LTCG and LTCG + STCG is then subtracted (which is essentially the LTCG). The tax on this is computed (which is essentially wages + STCG). The tax on the LTCG is computed and added to the prior.
terran
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Joined: Sat Jan 10, 2015 10:50 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by terran »

I would suggest you try filling out the Qualified Dividends and Capital Gain Tax Worksheet on page 33 of the Form 1040 instructions. Once you've done that you should have a very good understanding of how this works.
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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Which are taxed first long-term capital gains or short-term capital gains?

Post by FiveK »

FiveK wrote: Tue Sep 15, 2020 4:25 pm
VartAndelay wrote: Tue Sep 15, 2020 1:51 pm tax on wages + $61,716 + $52,928 = tax on wages + $114,644

Which is it?
That one.

Doing it "for real" with the stated incomes would be $142,963 total federal income tax.
It's somewhat a matter of taste regarding which of the usual tax estimation packages is "best".

Shown below is what it took to get the above answer from the personal finance toolbox:
Five entries (age, filing status, and the three income types (circled in red)) provided:
- Federal tax (circled in green)
- Worked example of the QD&CG Tax Worksheet (title circled in blue)

Image
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