Capital gains tax is the tax you owe when you sell something for more than you paid for it

When you buy an asset — a house, stock, cryptocurrency, or rental property — and later sell it for a higher price, the profit is called a capital gain. The IRS taxes that profit. The amount you owe depends on how long you held the asset and your total income for the year. You do not pay capital gains tax on the profit itself; you pay tax on the difference between what you paid (your basis) and what you sold it for (your sale price).

Capital gains tax is separate from income tax on wages or salary. It is also separate from property tax, which is paid to your state or county. The federal capital gains rate ranges from 0% to 20%, depending on your income bracket and how long you owned the asset. Some states also charge their own capital gains tax on top of the federal rate.

Key Takeaways

  • Capital gains tax applies only to profit — the difference between what you paid for an asset and what you sold it for.
  • Long-term capital gains (assets held over one year) are taxed at lower federal rates (0%, 15%, or 20%) than short-term gains, which are taxed as ordinary income.
  • Your tax rate depends on your filing status, total income for the year, and which tax bracket you fall into.
  • You report capital gains on Schedule D (Form 1040) when you file your federal tax return, usually by April 15 of the following year.
  • Some assets like primary residences, certain collectibles, and inherited property have special rules that may reduce or eliminate the tax.

Long-term versus short-term capital gains

The IRS divides capital gains into two categories based on how long you owned the asset. If you held it for one year or less, any profit is a short-term capital gain. Short-term gains are taxed as ordinary income, meaning they are added to your wages and taxed at your regular income tax rate — which can be as high as 37% depending on your bracket.

If you held the asset for more than one year, any profit is a long-term capital gain. Long-term gains receive preferential tax treatment. The federal tax rate on long-term gains is either 0%, 15%, or 20%, depending on your filing status and total taxable income. For most people, the rate is 15%. The 0% rate applies only to lower-income filers, and the 20% rate applies to high-income filers. This is why holding an asset longer often results in a smaller tax bill.

The holding period starts the day after you buy and ends the day you sell. If you buy stock on January 15 and sell it on January 15 of the next year, it qualifies as long-term. If you sell on January 14, it is short-term.

How your income bracket determines your capital gains rate

Your capital gains rate is not fixed. It depends on your total taxable income for the year and your filing status. The IRS sets income thresholds for each rate bracket, and these thresholds change every year. For 2024, for example, the 15% long-term rate applies to single filers with taxable income between roughly $47,000 and $518,000, but these numbers shift annually based on inflation.

This means you could owe 0% on some gains and 15% on others in the same year, depending on how much total income you have. If you are near a bracket boundary, timing the sale of an asset or spreading gains across two tax years can affect your rate. Some people deliberately sell assets in lower-income years to take advantage of the 0% rate.

Your filing status also matters. Single filers, married filing jointly, married filing separately, and head of household all have different income thresholds for each rate. A married couple filing jointly typically has higher thresholds than a single filer, so the same gain may be taxed at a lower rate.

What counts as a capital asset

Capital gains tax applies to most things you own and sell for profit: stocks, bonds, mutual funds, real estate, cryptocurrency, art, collectibles, and business equipment. The key is that you must have held it as an investment or for personal use, and you must have sold it.

Some assets are treated differently. If you sell your primary residence, you may be able to exclude up to $250,000 of gain (or $500,000 if married filing jointly) if you meet certain conditions: you must have owned the home for at least two of the last five years and lived in it as your main home for at least two of those years. This exclusion is available once every two years.

Inherited assets receive a "step-up in basis," which means the tax basis resets to the asset's value on the date of death. If your parent bought stock for $10,000 and it was worth $50,000 when they died, your new basis is $50,000. If you sell it immediately for $50,000, you owe no capital gains tax, even though it was worth much more when your parent bought it.

How to report capital gains on your tax return

You report capital gains using Schedule D (Form 1040), which you attach to your federal tax return. On Schedule D, you list each asset you sold during the year, the date you bought it, the date you sold it, your basis (what you paid), the sale price, and the gain or loss. You separate short-term and long-term gains into two sections.

If you have only a few transactions, you can fill out Schedule D by hand. If you have many, tax software or a tax professional can help organize the information. You will need records from your broker, real estate agent, or other seller showing the purchase price and sale price. If you cannot find the original purchase price, the IRS allows you to use a reasonable estimate, but keeping records is always better.

You file Schedule D along with your Form 1040 by April 15 of the year following the sale. If you owe capital gains tax, it is included in your total tax bill for that year. If you have capital losses (you sold something for less than you paid), you can use those losses to offset gains, which can reduce or eliminate your tax bill.

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. Capital losses can offset capital gains dollar-for-dollar. If you had $10,000 in long-term gains and $3,000 in long-term losses in the same year, your net gain is $7,000, and you pay tax only on that amount.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the net loss against your ordinary income (wages, salary, interest). Any remaining loss carries forward to future years, so you can use it to offset gains or income in years to come. This is called loss carryforward, and it has no expiration date.

Some investors deliberately sell losing positions late in the year to offset gains and reduce their tax bill. This strategy is called tax-loss harvesting. However, the IRS has a rule called the wash-sale rule that prevents you from immediately buying back the same or substantially identical security within 30 days before or after the sale. If you do, the loss is disallowed.

State capital gains taxes

In addition to federal capital gains tax, some states charge their own tax on capital gains. As of 2024, most states do not have a separate capital gains tax; they treat capital gains as ordinary income and tax them at their regular income tax rate. However, a growing number of states — including California, Washington, and New York — have enacted or are considering capital gains taxes that apply only to gains above a certain threshold, often $250,000 or $1 million.

If you live in a state with a capital gains tax, you will owe both federal and state tax on your gains. If you live in a state with no income tax (such as Florida, Texas, or Wyoming), you owe only federal capital gains tax. If you move to a different state after selling an asset, the state where you lived when you sold it is generally the one that can tax the gain, though rules vary.

Frequently Asked Questions

Do I owe capital gains tax if I do not sell the asset?

No. Capital gains tax is triggered only when you sell. If you own stock, real estate, or cryptocurrency that has increased in value but you have not sold it, you owe no tax on the gain. The gain is called "unrealized" until you sell. Some countries tax unrealized gains, but the United States does not.

What if I sold an asset at a loss?

You can use the loss to offset capital gains from other sales in 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 with no time limit.

How do I know my original purchase price if I lost the receipt?

Contact your broker or the financial institution where you held the asset; they keep records for years. For real estate, your closing statement shows the purchase price. If records are truly unavailable, you can use a reasonable estimate based on historical prices, but the IRS may challenge it if audited.

Is cryptocurrency taxed the same way as stocks?

Yes. The IRS treats cryptocurrency as property, not currency. When you sell or trade crypto for a gain, it is a capital gain taxed at the same rates as stocks. Even trading one cryptocurrency for another is a taxable event. You must report it on Schedule D.

Can I avoid capital gains tax by gifting an asset to someone else?

Gifting does not trigger capital gains tax for you, but the recipient does not receive a step-up in basis. If they later sell the asset, they will owe tax on the gain from your original purchase price, not from the date of the gift. Inherited assets do receive a step-up, which is why inheritance is often more tax-efficient than gifting.