How to Calculate Capital Gains Tax

You may have to pay capital gains taxes when you sell an asset that has gained value during your ownership. Knowing how to calculate capital gains tax can help you understand your tax burden from an asset sale and evaluate legal strategies that may manage or mitigate your capital gains tax liability. Contact 453 Deferred Sales Trust Powered by Pennington Law to discuss your situation with an experienced attorney.

What Are Capital Gains?

Capital gains refer to an asset’s value increase that may occur during a party’s ownership of the asset. Capital gains become locked in when the owner sells the asset for more than their original purchase price. For example, a homeowner may realize capital gains if they purchased their home for $100,000 and later sell it for $200,000 for a capital gain of $100,000. Similarly, a person may realize capital gains if they bought a share of stock for $10 and sell it for $30 for a capital gain of $20.

When Are Capital Gains Taxed?

The federal government and many states in the U.S. tax capital gains on many asset sales. By default, state and federal governments tax capital gains in the tax year when an owner sells an asset for more than they bought it or when an owner exchanges one asset for another. However, some legal strategies allow asset owners to defer paying capital gains taxes.

For example, a 1031 exchange allows a party that owns real estate for business or investment purposes to avoid paying capital gains taxes if they structure the sale as part of an integrated transaction with the purchase of another qualifying property. A party that sells an asset via the installment method, where the buyer pays part of the purchase price in a different year than the year of sale, can defer paying capital gains taxes until they receive payment from the buyer.

How Can I Calculate Capital Gain Tax?

In determining the capital gains tax you must pay when selling an asset, you start by ascertaining your “basis” in the asset. Calculating the basis requires you to determine the asset’s value on the date you acquired it. In most cases, the price you paid to purchase an asset becomes your basis in the asset. However, some rules can change a party’s basis in an asset. For example, when a person inherits real estate from a decedent, the heir takes a “stepped up” basis in the property, with their basis becoming the value of the property on the date of the decedent’s death rather than the price the decedent paid to acquire the property.

To calculate capital gains tax, you will subtract your basis in the asset from the price at which you sell it to determine your capital gain. The tax you pay on your capital gain will depend on whether you have a short-term or long-term capital gain. For example, suppose you bought a multi-family residential building for $1 million and sold the building for $1.25 million several years later. In that case, you would realize capital gains of $250,000 from the sale and must pay capital gains tax on that sum.

What Are Short-Term Capital Gains?

Capital gains qualify as short-term capital gains under federal tax law when a person owns an asset for a year or less. The federal government taxes short-term capital gains at the same tax rate that taxpayers pay on their ordinary income in that tax year. As of 2025, the federal tax code has seven tax brackets to tax income at graduated rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. Some states also tax short-term capital gains at rates different from long-term capital gains.

What Are Long-Term Capital Gains?

Capital gains become long-term capital gains when a person owns an asset for more than a year. The federal government taxes most long-term capital gains at a flat 15 percent. However, taxpayers earning more than a certain income threshold will pay a 20 percent tax rate on long-term capital gains. Low-income taxpayers may pay no tax on long-term capital gains. Thresholds for low- and high-income taxpayers change annually in response to inflation.

The federal tax code also imposes different long-term capital gains tax rates for certain assets, such as the following:

• Maximum 28 percent rate for the taxable part of a gain from selling Section 1202 qualified small business stock
• Maximum 28 percent rate for net capital gains from selling collectibles
• Maximum 25 percent rate for unrecaptured Section 1250 gain from selling Section 1250 real property

What Qualifies as a Capital Loss?

Capital losses occur when a person sells an asset for less than they bought it for. Federal tax law allows taxpayers in certain circumstances to offset their capital losses in a tax year from the capital gains they realized from selling other assets that same year. Here’s an example. Suppose that, in one year, you sell one asset for a $50,000 gain and another for a $25,000 loss. In that case, you may have the opportunity to offset your $25,000 loss from your $50,000 to realize net capital gains of $25,000.

Federal tax rules also allow taxpayers who have net capital losses for the year (e.g., deductible capital losses exceed capital gains) to use up to $3,000 ($1,500 for married taxpayers filing separately) to offset their ordinary income. Taxpayers with leftover net capital losses can carry those losses to future years to
offset capital gains or income.

Several rules restrict the use of capital losses to offset capital gains. For example, a taxpayer cannot use losses from the sale of securities to offset capital gains if the taxpayer repurchased those securities within 30 days of the sale for a loss. Furthermore, taxpayers may not deduct capital losses from the sale of assets owned for personal use (such as a personal residence) except in limited circumstances.

How Can I Reduce or Avoid Capital Gains Taxes?

When you sell an asset for more than you paid for it, you may incur capital gains tax on the sale. However, various legal strategies may be available to help you manage, mitigate, defer, or eliminate capital gains taxes from the sale. Some of the most common capital gains tax strategies include:

Utilize Tax Loss Harvesting

A tax loss harvesting strategy involves selling off qualifying investments for losses to offset capital gains from other asset sales. For example, if you sell some securities for a gain, you might sell other underperforming securities for a loss to offset your gains. By saving money on capital gains taxes, you can increase the money you have to reinvest. However, when pursuing a tax loss harvesting strategy, you should remember the restrictions on deducting losses, such as the rule barring the repurchase of securities within 30 days of a sale for a loss.

Time Your Sales

Timing asset sales can help you take advantage of more favorable capital gains tax rates or other circumstances that can reduce your tax burden. For example, you might avoid selling an asset in a year in which your income would push you into a higher ordinary income tax bracket (for short-term capital gains) or the 20 percent long-term capital gains tax bracket. You may also hold onto an asset to qualify for long-term capital gains tax rates, which may tax your gain at a lower rate than your ordinary income tax rate. You can also time a sale to coincide with selling other assets for losses you use to offset a gain from the sale.

Gift or Donate Assets

By gifting assets, you do not have to pay capital gains tax on those assets. However, the recipient of your gift may adopt your basis in the asset for purposes of calculating capital gain or loss if they sell the asset. Alternatively, you might donate assets to qualifying charitable causes that provide you with tax offsets or credits that can reduce your overall tax burden, minimizing the effect of paying capital gains taxes.

453 Deferred Sales Trust

Asset owners can avoid capital gains tax with a 453 deferred sales trust (DST), which our law firm likes to call “The Tax Tool You Didn’t Know You Had.” With a deferred sales trust, an asset owner can defer paying capital gains taxes until the trust distributes principal from the proceeds of the asset sale. Thus, a deferred sales trust can defer capital gains taxes indefinitely if it holds onto the sale proceeds.

How Can a Lawyer from 453 Deferred Sales Trust Powered by Pennington Law Help?

At 453 Deferred Sales Trust Powered by Pennington Law, our lawyers know what to look for if you’re considering selling an asset. We can help you determine capital gains taxes on your asset sale and develop legal strategies to manage your tax liabilities by:

• Reviewing the details of your proposed sale to determine your potential tax liability
• Discussing your financial needs and goals to identify legal strategies that can help you manage capital gains taxes
• Helping you make an informed decision about how to proceed with an asset sale
• Structuring the sale so you can take advantage of available tax benefits

Contact Our 453 Deferred Sales Trust Lawyers Today

When you realize capital gains from an asset sale, hiring experienced legal counsel can help you calculate your capital gains tax liability. A knowledgeable attorney can also help you devise legal strategies to manage or mitigate your capital gains taxes. Contact 453 Deferred Sales Trust Powered by Pennington Law today for a free, no-obligation consultation to discuss your options.