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Taxes

Realized capital gains

If you bought low and sold high, prepare to pay taxes on your capital gains.
6 minute read

Points to know

  • Capital gains are "realized" (and subject to tax) when you sell investments that have increased in value.
  • Capital gains are subject to different tax rates depending on how long you owned the investment.

What are capital gains?

Capital gains are profits on an investment. When you sell investments at a higher price than what you paid for them, the capital gains are "realized" and you'll owe taxes on the amount of the profit.

Figuring out how much of your sale amount was made up of taxable earnings can be tricky. You'll first need to know how much you originally paid for the shares (your cost basis).

Learn more about cost basis

Realized gains vs. unrealized gains

Gains that are "on paper" only are called "unrealized gains." For example, if you bought a share for $10 and it's now worth $12, you have an unrealized gain of $2. You won't pay any taxes until you sell the share.

Unrealized gains could be very important if you invest in funds, however. When you buy shares of a mutual fund or ETF (exchange-traded fund), you're also "buying" any unrealized gains it has—and you'll be subject to their eventual taxation.

Find out more about fund taxation

What is the capital gains tax rate?

Long-term capital gains are gains on investments you owned for more than 1 year. They're subject to a 0%, 15%, or 20% tax rate, depending on your level of taxable income.

Short-term capital gains are gains on investments you owned 1 year or less and are taxed at your ordinary income tax rate.

How are capital gains reported?

Realized capital gains for individual securities are reported to you and to the IRS on Form 1099-B. Realized gains for funds are reported on Form 1099-DIV.

See more about tax forms

LONG-TERM CAPITAL GAINS & AMT

Realizing a capital gain that's large in comparison to the rest of your income could trigger alternative minimum tax (AMT). If you're planning to sell investments that have large capital gains, talk to a tax advisor about whether it could be a good idea to divide up the sale over 2 calendar years.

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How mutual funds & ETFs are taxed
The investment tax you owe depends both on your own buying and selling and on that of your funds.

Get more from Vanguard. Call 1-800-962-5028 to speak with an investment professional.

Get more from Vanguard. Call 1-800-962-5028 to speak with an investment professional.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.