Income Tax vs. Capital Gains Tax: What’s the Difference?

Oct 17, 2023 By Triston Martin

A person's income tax is based on the amount of money they make from their job, whether that money is in cash, property, or services. Income from the sale or transfer of a capital asset, such as a stock or real estate, is subject to capital gains tax.

Income Tax

According to your tax bracket, you pay a different percentage of your income tax, depending on how much money you make during the year. Also, tax brackets differ if you file as a single individual or with a spouse. After deductions, 10% to 37% of a person's taxable annual income will be subject to federal income tax in 2021 and 2022.

Progressive taxes are in place in the U.S. People with lesser earnings pay less in taxes since it is assumed that higher-income people can afford to pay more.

The progressive system, on the other hand, is just minor. Taxes are levied at varying rates on different types of income.

Capital Gains Tax

Capital gains tax rates are based on the time the asset was owned or retained by the seller. Ordinary income tax rates apply to gains on assets owned for less than a year, considered short-term capital gains. While holding an investment for even more than a year is not required, long-term capital gains are more advantageous. These rates might range from 0% to 20% based on income.

If a single filer's taxable income were $40,400 or less in 2021, they would pay no long-term capital gains tax. People who make $445,850 or less are charged 15%, while those who make $445,850 or more are charged 20%.

The benchmarks have been raised significantly for 2022: If your annual income is $41,675 or less, you pay no taxes on long-term capital gains; if your annual income is $459,750 or less, you pay 15%; and if your yearly income surpasses that threshold, you pay 20%.

A Comparison Of Income Tax And Capital Gains Tax Through Example

In the year 2021, Joe Taxpayer took home $35,000. He owes 10% on the first $9,950 income and 12% on any additional income he accrued. He owes a total of $4,001 in taxes ($995 plus $3,006).

In the case of a small capital gain of $1,000, Joe will owe $120 in taxes if he decides to sell the asset. The capital gain is tax-free if Joe holds onto the property for one year and one day before selling it.

Ordinary income and realized capital gains are two independent taxable incomes for tax purposes. Earned wages, rental income, and interest income from loans, CDs, and bonds are all examples of ordinary income (except for municipal bonds). You realize a capital gain when you sell a capital asset at a higher price than you paid. Your capital gain is not "realized" if the value of your asset increases but you do not sell it. As a result, you owe no tax.

First, remember that long-term capital gains are taxed at a rate far lower than normal income. To qualify for the advantageous long-term rate, investors must keep their assets for at least a year and a day after they've appreciated.

How Are Capital Gains Taxed?

Based on your total income and filing status, the amount of capital gains tax that must be paid depends on how long you had the asset before selling it. After less than one year of ownership, the profit from selling an asset is considered regular income and taxed according to your federal income tax bracket. Lengthy-term capital gains are taxed at a reduced rate if they are obtained from the sale of assets held for an extended period.

Will My Income Tax Rate Go Up If I Have Capital Gains?

It all depends on how long the capital gains are expected to last. However, the capital gains tax category you may be pushed into may not influence your regular income tax rate because such payments are not considered ordinary income and are not taxed as such.

More favorable treatment is given to assets that have been sold within a year of each other. Gains from short-term investments are treated as ordinary income so that you may be taxed at a higher marginal rate.


If you have a regular source of income, such as a job with a set monthly wage, your annual income is subject to taxation at several different rates. Law requires taxpayers to file a yearly income tax return to assess their tax obligations.

When you sell or transfer any capital asset, such as a stock, bond, share, or mutual fund, you make a profit subject to taxation, which is the case for ordinary income and capital gains.

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