Capital Gains Taxes: An Overview (CRS Report for Congress)
| Release Date |
Revised March 16, 2018 |
| Report Number |
96-769 |
| Authors |
Jane G. Gravelle, Senior Specialist in Economic Policy |
| Source Agency |
Congressional Research Service |
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Summary:
T
ax
es
on
long term
capital gains
(
on assets
held for at least a year)
are imposed at
rates that
correspond to pre
-
2018 brackets:
a 0% rate for those whose income place
d
them in the regular
15% bracket
or less
(now in regular bracket of 12%)
,
and
15% for taxpayers in higher brackets
,
except for those in the 39.6% bracket.
The tax revision a
dopted in December of 2018 (
P.L. 115
-
97
) maintained the links to the income level corresponding to the rate brackets in prior law.
Therefore, the tax rates on capital gains
are affected only by changes in the deductions to arrive at
taxable income and the use of a different method of indexing for inflation. Under the new law, the
original 10% and 15% brackets are replaced by a single 12% rate bracket that ends at the same
poi
nt as the end of the 15% bracket. There is no 39.6% bracket (the top rate is 37% and begins at
a higher level than the top bracket under higher law
)
.
In 2017, the 39.6% bracket beg
an
with
taxable income
of $470,700
for joint returns and $4
1
8,4
00
for single
returns
.
There is also an
exclusion of $500,000 ($250,000 for single returns) for gains on home sales.
T
ax legislation in 1997 reduced capital gains taxes on several types of assets, imposing a 20%
maximum tax rate on long
-
term gains, a rate temporarily r
educed to 15% for 2003
-
2008, which
was extended for two additional years in 2006.
Legislation enacted in December 2010 extended
the lower rates for an additional two years, thorough 2010.
The American Taxpayer Relief Act of
2012 (
P.L. 112
-
240
) made the lower rates permanent except for very high income taxpayers.
Health reform legislation in 2010 provided for a tax at
Medicare rates of 3.8% on high
-
income
taxpayers on various
forms of passive income, including capital gains. The tax applies to passive
income in excess of $250,000 for joint returns and $200,000 for single returns.
The capital gains tax ha
d
been a tax cut target since the 1986 Tax Reform Act treated capital gain
s
as ordinary income. An argument for lower capital gains taxes is reduction of the lock
-
in effect.
Some also believe that lower capital gains taxes will cost little compared to the benefits they
bring and that lower taxes induce additional economic growth
, although the magnitude of these
potential effects is in some dispute. Others criticize lower capital gains taxes as benefitting higher
income individuals and express concerns about the budget effects, particularly in future years.
Another criticism of lo
wer rates is the possible role of a larger capital gains tax differential in
encouraging tax sheltering activities and adding complexity to the tax law.
