What capital gains tax is and why it matters

Capital gains tax is a tax on the profit you make when you sell an asset for more than you paid for it. If you buy a stock for $1,000 and sell it for $1,500, that $500 profit is a capital gain. The federal government taxes this profit at rates that depend on how long you held the asset and how much total income you earned that year.

The tax applies to many things: stocks, bonds, real estate, art, cryptocurrency, and business interests. It does not apply to the money itself — only to the increase in value. If you sell something for less than you paid, that loss can sometimes reduce your tax bill.

Capital gains tax rates are different from income tax rates on wages and salaries. This matters because the same person might pay one rate on their job income and a different rate on investment profits.

Key Takeaways

  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your total income for the year.
  • Short-term capital gains (assets held one year or less) are taxed as ordinary income at rates up to 37%.
  • Your filing status, total income, and state of residence all affect the rate you pay on the same profit.
  • Losses from investments can reduce your capital gains tax, and unused losses can carry forward to future years.

Long-term versus short-term capital gains rates

The IRS divides capital gains into two categories based on how long you owned the asset. Long-term capital gains apply when you hold an asset for more than one year before selling. Short-term capital gains apply when you hold it for one year or less.

Short-term gains are taxed as ordinary income — the same rates that apply to wages, salary, and interest. Those rates range from 10% to 37% depending on your income bracket. Most people pay short-term capital gains tax at a higher rate than long-term gains tax on the same dollar amount.

Long-term capital gains have their own rate structure: 0%, 15%, or 20%. Which rate you pay depends on your total income for the year and your filing status. A person in the 0% bracket might pay nothing on long-term gains, while someone in a higher income bracket pays 20% on the same type of asset.

How your income level determines your rate

The IRS uses income brackets to determine which long-term capital gains rate applies to you. These brackets change each year and differ based on whether you file as single, married filing jointly, head of household, or another status.

For 2024, a single filer with taxable income up to roughly $47,000 may pay 0% on long-term capital gains. Income between roughly $47,000 and $518,000 may be taxed at 15%. Income above that threshold may be taxed at 20%. Married couples filing jointly have higher thresholds — roughly $94,000 and $583,000 — before moving into the next bracket.

These numbers shift annually. The IRS publishes updated brackets each year, usually in late fall for the following tax year. Your total income includes wages, self-employment earnings, interest, dividends, and other sources — not just capital gains. A person with $40,000 in wages and $10,000 in long-term capital gains has $50,000 in total income, which may push them into a higher capital gains bracket than someone with only $10,000 in capital gains.

State and local taxes on capital gains

Federal capital gains tax is only part of what you owe. Most states also tax capital gains, usually at their ordinary income tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so residents pay only federal capital gains tax.

Some states tax capital gains differently than other income. California, for example, taxes long-term capital gains at the same rate as ordinary income. New York taxes capital gains as ordinary income but offers a deduction for some long-term gains. A handful of states have recently passed or are considering separate capital gains taxes that apply only to investment profits above a certain threshold.

Your city or county may also impose a local income tax that includes capital gains. The total tax you pay on a $10,000 gain can range from 20% (federal only, in a low bracket) to over 50% (federal plus state plus local, in a high bracket). Check your state's tax authority website or speak with a tax professional to understand your specific situation.

How to report capital gains on your tax return

You report capital gains on Schedule D (Form 1040), which lists each sale separately. Your broker or investment company sends you a Form 1099-B showing the sales you made during the year — the date you bought, the date you sold, and the proceeds. You use this form to fill out Schedule D.

Schedule D separates short-term gains (Part I) from long-term gains (Part II). You calculate the profit or loss for each sale by subtracting your cost basis (what you paid, plus fees) from the sale price. The form then totals your short-term and long-term gains or losses separately.

If your total long-term gains exceed your total long-term losses, you report the net gain on your tax return. If losses exceed gains, you can deduct up to $3,000 of the net loss against other income in that year. Any unused losses carry forward to future years, reducing your capital gains tax in those years.

Using losses to reduce your capital gains tax

If you sell an investment at a loss, you can use that loss to offset capital gains from other sales in the same year. If you sold Stock A for a $5,000 gain and Stock B for a $2,000 loss, your net capital gain is $3,000, 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 excess loss against wages, salary, and other ordinary income. If your total loss is $8,000 and your total gain is $0, you deduct $3,000 against other income that year. The remaining $5,000 carries forward to the next year, where you can deduct another $3,000 and carry forward $2,000 again.

One rule to know: the IRS "wash sale" rule prevents you from claiming a loss if you buy the same or substantially identical security within 30 days before or after the sale. This rule stops people from selling at a loss for the tax deduction and immediately buying back the same investment. If you trigger a wash sale, the loss is disallowed, and the cost basis of the new purchase is adjusted instead.

Special situations and exceptions

Certain assets and situations have different rules. Real estate held as a primary residence qualifies for an exclusion: you can exclude up to $250,000 of gain (or $500,000 if married filing jointly) if you owned and lived in the home for at least two of the last five years. This exclusion applies once every two years.

Inherited assets receive a "step-up in basis," meaning the cost basis resets to the asset's value on the date of death. If your parent bought a stock for $10,000 and it was worth $50,000 when they died, your new cost basis is $50,000. If you sell it the next day for $50,000, you owe no capital gains tax, even though the asset had gained $40,000 before you inherited it.

Collectibles — art, antiques, precious metals — are taxed at a maximum rate of 28% on long-term gains, which is higher than the standard 0%, 15%, or 20% rates. may have access to small business stock may may have access to for an exclusion of 50% to 100% of the gain under certain conditions. These exceptions are narrow and have specific requirements; consult a tax professional if you think one applies to you.

Frequently Asked Questions

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

No. Capital gains tax applies only when you sell an asset and realize the gain. If you own a stock that has doubled in value but you have not sold it, you owe no tax on that increase. The tax is due in the year you sell.

What if I sold an investment at a loss — can I deduct it?

Yes, up to limits. You can use investment losses to offset capital gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 against other income. Unused losses carry forward to future years. The wash sale rule prevents you from claiming a loss if you buy the same security within 30 days of the sale.

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

Count the days from the purchase date to the sale date. If it is more than one year, it is long-term. If it is one year or less, it is short-term. The IRS counts the purchase date as day zero and the sale date as day one, so holding from January 1 to January 2 of the next year qualifies as long-term.

Does the capital gains rate change every year?

The federal rates (0%, 15%, 20%) stay the same, but the income thresholds that determine which rate applies change annually for inflation. The IRS publishes updated brackets in late fall. State capital gains taxes and rates also vary by state and may change year to year.

What if I live in a state with no income tax — do I still owe federal capital gains tax?

Yes. Federal capital gains tax applies regardless of where you live. States with no income tax do not tax capital gains, so you pay only the federal rate. States with income tax typically tax capital gains at their ordinary income rate or a separate rate, depending on state law.