Long-term capital gains are usually taxed at lower rates than ordinary income, but short-term gains are taxed the same way

Capital gains — the profit you make when you sell an asset like stock, real estate, or cryptocurrency — split into two categories for tax purposes. Short-term capital gains, from assets you held for one year or less, are taxed as ordinary income at your regular tax bracket rate. Long-term capital gains, from assets you held for more than one year, get preferential rates: 0%, 15%, or 20% depending on your total income, which is almost always lower than your ordinary income tax rate.

The distinction matters because it changes what you owe. Sell a stock after holding it eleven months and the profit lands in your ordinary income pile. Hold it thirteen months and the same profit gets the long-term rate instead. The IRS tracks your holding period from the purchase date to the sale date.

Key Takeaways

  • Short-term capital gains (assets held one year or less) are taxed at your ordinary income tax rate, which can be as high as 37%.
  • Long-term capital gains (assets held more than one year) are taxed at preferential rates of 0%, 15%, or 20%, determined by your total income for the year.
  • The holding period is measured from the purchase date to the sale date, and one day past twelve months qualifies for long-term treatment.
  • Your total income for the year determines which long-term rate applies to you, so a large gain can push you into a higher capital gains bracket.

How the IRS counts your holding period

The holding period starts on the date you purchase the asset and ends on the date you sell it. The IRS counts the purchase date as day one. If you buy stock on January 15 and sell it on January 15 of the following year, you have held it for exactly one year and may have access to for long-term treatment. If you sell on January 14, it is short-term.

This rule applies to all capital assets: individual stocks, mutual funds, bonds, real estate, cryptocurrency, collectibles, and business interests. The holding period is the same regardless of how the asset performed or whether you received dividends or interest along the way.

Short-term gains taxed as ordinary income

When you sell an asset you have owned for one year or less, the profit is added to your ordinary income for the year and taxed at your marginal tax bracket. If you are in the 24% tax bracket and realize a $10,000 short-term gain, that gain is taxed at 24%. If you are in the 37% bracket, it is taxed at 37%.

Short-term gains can push you into a higher tax bracket. If your ordinary income puts you at the edge of the 24% bracket and you realize a $50,000 short-term gain, part of that gain may be taxed at 32% or 35%. The IRS taxes your income in layers, so gains that land in higher brackets are taxed at higher rates.

Long-term gains and the preferential rate brackets

Long-term capital gains are taxed at three rates: 0%, 15%, or 20%. Which rate applies depends on your taxable income for the year, not on the size of the gain itself. The income thresholds change each year and vary by filing status.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025 and married filers filing jointly up to $94,050. The 15% rate applies to income above those thresholds up to $518,900 (single) or $583,750 (married filing jointly). Income above those amounts is taxed at 20%. These thresholds increase slightly each year for inflation.

A large long-term gain can push you from one bracket into another. If you are single with $40,000 in ordinary income and realize a $20,000 long-term gain, the first $7,025 of the gain is taxed at 0% and the remaining $12,975 is taxed at 15%.

How net investment income tax affects high earners

Taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) pay an additional 3.8% tax on net investment income, which includes capital gains. This tax is separate from the ordinary income or capital gains tax rate and applies on top of it.

For a high-income taxpayer in the 20% long-term capital gains bracket who also pays the net investment income tax, the effective rate on long-term gains is 23.8%. Short-term gains for the same taxpayer would be taxed at their ordinary income rate plus 3.8%.

State and local taxes on capital gains

Most states tax capital gains as ordinary income at their state income tax rate. A few states — including Washington, Tennessee, and Florida — do not have an income tax and therefore do not tax capital gains. Some states like California tax long-term and short-term gains identically at the state level, regardless of the federal preferential rate.

New York City and a handful of other municipalities impose local income taxes that apply to capital gains. Your total tax bill on a capital gain includes federal tax, state tax (if your state has one), and local tax (if your locality has one).

Capital losses and how they offset gains

If you sell an asset at a loss, that loss can offset capital gains from other sales. If you sold one stock for a $5,000 gain and another for a $3,000 loss in the same year, you report a net capital gain of $2,000. Capital losses are matched against capital gains of the same type first — long-term losses offset long-term gains, short-term losses offset short-term gains — before they offset the other type.

If your capital losses exceed your capital gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income. Any remaining loss carries forward to future years and can be used to offset future gains or ordinary income.

Frequently Asked Questions

Can I hold an asset for exactly one year and get the long-term rate?

No. You must hold the asset for more than one year. If you buy on January 15 and sell on January 15 of the next year, it is exactly one year and treated as short-term. You need to sell on January 16 or later to may have access to for long-term treatment.

What if I inherit stock or real estate — does the holding period reset?

No. When you inherit an asset, you receive a "stepped-up basis" (the value is reset to the market price on the date of death), but you do not get a new holding period. The asset is treated as long-term regardless of how long you hold it after inheriting it.

Do dividends from stock get taxed differently than capital gains?

may have access to dividends are taxed at the same preferential rates as long-term capital gains (0%, 15%, or 20%). Non-may have access to dividends are taxed as ordinary income. Most dividends from U.S. corporations are may have access to if you held the stock for at least 60 days around the dividend date.

If I sell at a loss, do I still have to report it?

Yes. You must report all sales, whether they result in gains or losses. Losses offset gains and can reduce your ordinary income, so reporting them lowers your tax bill. If you do not report a loss, you cannot use it to offset other income.

Does the long-term rate apply to real estate I sell?

Long-term capital gains rates apply to real estate you held for more than one year, with one major exception: if you lived in the home as your primary residence for at least two of the last five years, you can exclude up to $250,000 of gain (or $500,000 if married filing jointly) from tax entirely. Investment property and second homes do not may have access to for this exclusion.