What capital gains tax is and how much you owe

Capital gains tax is a tax on profit you make when you sell an asset for more than you paid for it. The amount you owe depends on three things: how much profit you made, how long you held the asset, and your income level that year. The federal government taxes capital gains at different rates than regular income, and most states add their own tax on top.

You only pay capital gains tax when you actually sell something at a profit. Holding an investment that goes up in value does not trigger a tax bill. The tax applies to stocks, real estate, cryptocurrency, collectibles, and most other assets. If you sell at a loss, you do not owe capital gains tax — you may even be able to use that loss to reduce taxes on other gains.

Key Takeaways

  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% federally, depending on your total income that year.
  • Short-term capital gains (assets held one year or less) are taxed as regular income at your ordinary tax rate, which can be as high as 37%.
  • Most states also tax capital gains, with rates ranging from zero to over 13%, though a few states have no capital gains tax at all.
  • Your total income for the year determines which federal rate bracket you fall into, so a large gain can push you into a higher tax bracket.
  • You report capital gains on your federal tax return using Form 8949 and Schedule D, and your state return if your state taxes capital gains.

Long-term versus short-term capital gains rates

The federal government taxes capital gains differently depending on how long you held the asset. If you owned it for more than one year before selling, it is a long-term capital gain. Long-term gains are taxed at preferential rates: 0%, 15%, or 20%, depending on your income level. These rates are much lower than ordinary income tax rates.

If you owned the asset for one year or less, it is a short-term capital gain. Short-term gains are taxed as ordinary income at your regular tax bracket rate, which ranges from 10% to 37% federally. This means a short-term gain can cost you significantly more in tax than a long-term gain of the same size. The holding period is measured from the date you bought the asset to the date you sold it.

The long-term rate brackets for 2024 are based on your filing status and total taxable income. For single filers, the 0% rate applies to income up to about $47,000, the 15% rate applies to income from about $47,000 to $518,000, and the 20% rate applies to income above that. These thresholds change each year and vary by filing status (single, married filing jointly, head of household, etc.).

How your total income affects your capital gains tax rate

Your capital gains do not sit in isolation on your tax return. They are added to your other income — wages, interest, dividends, self-employment income — to determine your total taxable income for the year. That total income determines which tax bracket you fall into, which then determines your capital gains rate.

This means a large capital gain can push you into a higher tax bracket. For example, if you are a single filer earning $45,000 in wages and you sell a stock for a $50,000 long-term gain, your total taxable income is $95,000. You would pay 0% tax on the first $2,000 of the gain (to reach the 0% bracket limit), then 15% on the remaining $48,000. Without the gain, you would have paid no capital gains tax at all.

This effect is called "bracket creep," and it matters most when you have a very large gain in a single year. Some people spread asset sales across multiple years to stay in lower brackets, though this requires planning ahead.

State capital gains taxes

Most states tax capital gains as part of their regular income tax. State rates vary widely: some states have no capital gains tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming), while others tax capital gains at rates up to 13% or higher. A few states — California, Hawaii, and Oregon — have separate, higher capital gains tax rates on top of their regular income tax.

The states that do tax capital gains usually treat long-term and short-term gains the same way, taxing both as ordinary income. This is different from the federal system, which gives long-term gains preferential rates. So even if your federal long-term gain is taxed at only 15%, your state might tax the same gain at 5% to 10% or more.

If you live in a state with no capital gains tax and sell an asset, you owe only federal tax. If you live in a state with capital gains tax and move to a state without it, the tax treatment of gains you realized before moving depends on your state's rules — some states tax gains based on where you lived when you sold, others based on where you lived when you bought.

How to report capital gains on your tax return

You report capital gains to the IRS using Form 8949 (Sales of Capital Assets) and Schedule D (Capital Gains and Losses). Form 8949 lists each asset you sold: the date you bought it, the date you sold it, your cost basis (what you paid), the sale price, and your gain or loss. Schedule D summarizes your long-term and short-term gains and losses and calculates your net capital gain or loss for the year.

Your broker or investment company sends you a Form 1099-B (Proceeds from Broker and Barter Exchange Transactions) listing all sales you made that year. This form goes to the IRS as well, so your numbers must match. If you sold real estate, you may also receive a Form 1099-S (Proceeds from Real Estate Transactions). Keep records of your original purchase price, purchase date, sale price, and sale date for at least three years.

On your state tax return, you typically report capital gains on your state income tax form or a state-specific schedule. The exact form depends on your state. If your state has no capital gains tax, you do not report capital gains on your state return at all.

Capital losses and how they reduce your tax bill

If you sell an asset at a loss, you can use that loss to reduce your capital gains tax. If your capital losses exceed your capital gains in a year, you can deduct up to $3,000 of the net loss against your ordinary income (wages, salary, etc.). Any loss above $3,000 carries forward to future years, where you can use it to offset future gains or ordinary income.

Capital losses must be matched by type: long-term losses first offset long-term gains, and short-term losses first offset short-term gains. Only after you have netted losses against gains of the same type can you use remaining losses against gains of the other type. This matching rule can affect your overall tax rate, because long-term gains are taxed more favorably than short-term gains.

Some investors deliberately sell losing positions late in the year to harvest tax losses — a strategy called tax-loss harvesting. This reduces their tax bill without changing their overall investment strategy. However, if you buy the same or a substantially identical asset within 30 days before or after the sale, the IRS disallows the loss under the wash-sale rule.

Special situations: real estate, inherited assets, and collectibles

Real estate capital gains follow the same long-term and short-term rules as other assets, but with one major exception: if you sell a primary residence, you may exclude up to $250,000 of gain (or $500,000 if married filing jointly) from tax. You must have owned and lived in the home for at least two of the five years before the sale. This exclusion applies only once every two years.

If you inherit an asset, you receive a stepped-up basis. This means your cost basis is the asset's value on the date the person died, not what they originally paid. If you sell the inherited asset shortly after, you owe little or no capital gains tax, even if the original owner bought it decades earlier at a much lower price. This is a major tax benefit of inherited assets.

Collectibles — art, antiques, precious metals, and similar items — are taxed at a maximum federal rate of 28% on long-term gains, which is higher than the 20% rate for most long-term gains. Cryptocurrency is treated as property, so gains are taxed as capital gains. If you receive cryptocurrency as payment for work, that is taxed as ordinary income at the time you receive it, and then any gain or loss when you sell is taxed as a capital gain or loss.

Frequently Asked Questions

Do I owe capital gains tax if I sell an asset at a loss?

No. You only owe capital gains tax on profit. If you sell at a loss, you can use that loss to reduce capital gains tax on other sales or to reduce ordinary income tax by up to $3,000 per year. Losses above $3,000 carry forward to future years.

What if I hold an investment for exactly one year — is it long-term or short-term?

It is short-term. You must hold the asset for more than one year for it to may have access to as long-term. If you buy on January 15 and sell on January 15 the next year, that is exactly one year, which does not meet the "more than one year" requirement. You would need to sell on January 16 or later.

Can I reduce my capital gains tax by donating the asset to charity instead of selling it?

Yes. If you donate appreciated stock or real estate to a may have access to charity, you avoid the capital gains tax entirely and can deduct the fair market value of the asset as a charitable contribution. This is often more tax-efficient than selling and donating the proceeds.

How do I know my cost basis if I bought an asset many years ago?

Check your original purchase confirmation, brokerage statements, or tax returns from the year you bought it. If you cannot find records, you can contact your broker — they may have historical data. For real estate, your closing statement shows your purchase price. If records are truly unavailable, you may need to reconstruct basis using available evidence.

Does the capital gains tax rate change every year?

The federal tax rates (0%, 15%, 20%) stay the same, but the income thresholds that determine which rate applies adjust annually for inflation. State rates also change periodically based on state law. Check current rates for the year you are selling to know which bracket you fall into.