What capital gains tax is and how much you pay

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 how long you held the asset, your total income for the year, and your filing status. The federal government taxes capital gains at different rates than ordinary income, and most states add their own tax on top.

If you held an asset for one year or less before selling it, the profit counts as a short-term capital gain and is taxed at your regular income tax rate — which can be 10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on your income bracket. If you held it longer than one year, it's a long-term capital gain and is taxed at a lower rate: 0%, 15%, or 20%, again based on your income.

State taxes vary widely. Some states don't tax capital gains at all. Others tax them as ordinary income. A few have separate capital gains tax rates. You owe both federal and state tax unless you live in a state with no capital gains tax.

Key Takeaways

  • Short-term capital gains (assets held one year or less) are taxed at your regular income tax rate, which ranges from 10% to 37% federally.
  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% federally, depending on your income and filing status.
  • Your state may add additional tax on capital gains, ranging from 0% to over 13% depending on where you live.
  • The total tax you owe is calculated on your net capital gain — the profit after subtracting losses from the same year.

Long-term vs. short-term capital gains rates

The holding period matters because long-term capital gains receive preferential tax treatment. A long-term gain is taxed at 0%, 15%, or 20% depending on your taxable income and filing status. For 2024, the 0% rate applies to single filers with taxable income up to $47,025, married filing jointly up to $94,050, and head of household up to $63,000. Income above those thresholds but below a second threshold is taxed at 15%. Income above the second threshold is taxed at 20%.

Short-term gains have no preferential rate. They're added to your ordinary income and taxed at whatever bracket your total income falls into. This means a short-term gain can push you into a higher tax bracket entirely. For example, if you're single and earn $50,000 in wages, you're in the 22% bracket. A $10,000 short-term capital gain raises your total income to $60,000, and the gain itself is taxed at 22%. The same $10,000 long-term gain might be taxed at 15% or even 0%, depending on the exact numbers.

How to calculate your capital gains tax

Start with the sale price of the asset minus what you originally paid for it. That's your gain. If you sold multiple assets in the same year, add up all the gains and losses. Losses reduce your taxable gains dollar-for-dollar.

Separate your gains into short-term and long-term. Calculate short-term gains first and add them to your ordinary income to find your tax bracket. Then apply the long-term capital gains rates to your long-term gains based on how much income room you have left before hitting the next threshold.

Example: You're single, earn $50,000 in wages, and have a $20,000 long-term capital gain. Your total income is $70,000. The first $47,025 of your capital gain is taxed at 0%. The remaining $2,975 is taxed at 15%. You owe $446.25 in federal capital gains tax on that gain, plus your regular income tax on the $50,000 in wages.

State capital gains taxes

Most states tax capital gains as ordinary income, meaning they apply their regular income tax rate to the gain. A few states have no capital gains tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only dividend and interest income, not capital gains from selling assets.

A handful of states have separate capital gains tax rates. California taxes long-term gains at the same rate as ordinary income (up to 13.3%). Washington has a 7% tax on long-term capital gains over $250,000. Colorado taxes long-term capital gains at 4.63%. The specifics change by state and sometimes by year, so check your state's revenue department website for the current rules.

If you sell an asset and move to a different state before the year ends, you may owe tax to both states. The rules depend on where you lived when you sold the asset and where you live when you file your return.

Capital losses and how they reduce your tax bill

If you sell an asset for less than you paid for it, you have a capital loss. Losses offset gains dollar-for-dollar. If you have $15,000 in long-term gains and $5,000 in long-term losses in the same year, your net long-term gain is $10,000.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income. Any loss beyond $3,000 carries forward to future years and can be used to offset future gains or ordinary income (up to $3,000 per year) indefinitely. This is called tax-loss harvesting — deliberately selling losing positions to reduce your tax bill.

Losses must be matched with gains of the same type first. Short-term losses offset short-term gains. Long-term losses offset long-term gains. Only after one type is exhausted do they offset the other type.

Special situations and exceptions

Some assets receive different treatment. Collectibles (art, coins, stamps) are taxed at a maximum 28% rate even if held long-term. Certain real estate transactions may may have access to for a $250,000 exclusion (single) or $500,000 exclusion (married filing jointly) if you lived in the home for at least two of the last five years. Inherited assets receive a "step-up in basis," meaning the tax is calculated based on the asset's value on the date of death, not the original purchase price.

may have access to small business stock held for more than five years may be partially excluded from taxation. Gains from selling certain municipal bonds are not taxed federally. If you're subject to the Net Investment Income Tax (NIIT), an additional 3.8% tax applies to capital gains if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).

Reporting capital gains on your tax return

You report capital gains on Schedule D (Form 1040), which lists each transaction separately. Your broker sends you a Form 1099-B showing sales proceeds. You'll need your original purchase price and date, sale price and date, and whether the gain is short-term or long-term. If you have many transactions, you may also file Form 8949 to reconcile your records with the broker's report.

The net capital gain or loss from Schedule D flows to your Form 1040. Long-term gains are reported on line 7 of the 2024 Form 1040; short-term gains are included in ordinary income. If you have a net capital loss, it reduces your ordinary income up to $3,000 per year.

Frequently Asked Questions

Do I owe capital gains tax if I haven't sold the asset yet?

No. Capital gains tax is only owed when you actually sell the asset and realize the gain. An increase in value while you still own it is an unrealized gain and is not taxed. You only pay tax in the year you sell.

What if I sold an asset at a loss?

You can use the loss to offset capital gains from the same year. If losses exceed gains, you can deduct up to $3,000 against ordinary income. Any remaining loss carries forward to future years and can be used the same way.

How do I know if my gain is short-term or long-term?

Count the days from the date you bought the asset to the date you sold it. If it's one year or less, it's short-term. If it's more than one year, it's long-term. The IRS counts the purchase date as day zero and the sale date as day one.

Do I have to report capital gains if they're small?

Yes. Any capital gain, no matter how small, must be reported on your tax return. The IRS matches your reported gains to the Form 1099-B your broker sends them, so unreported gains are likely to be caught.

What happens if I inherit an asset and then sell it?

Inherited assets receive a step-up in basis to their value on the date of death. If you inherit a stock worth $100 and it was worth $50 when the person died, your basis is $50. If you sell it immediately for $100, you owe tax on only $50 of gain, not $50. The holding period for long-term treatment starts fresh from the date of death.