Long-term capital gains tax is the tax you owe when you sell an investment you've held for more than one year at a profit
When you buy a stock, bond, real estate, or other investment and sell it later for more than you paid, that profit is called a capital gain. The IRS taxes that gain differently depending on how long you held it. If you held the investment for more than one year before selling, it's a long-term capital gain and gets taxed at a lower rate than ordinary income. If you held it for one year or less, it's a short-term capital gain and gets taxed like regular wages or salary.
The long-term rate matters because it can be significantly lower than your regular income tax bracket. For 2024, long-term capital gains rates are 0%, 15%, or 20%, depending on your total income for the year. Most people pay 15%. By contrast, short-term gains and ordinary income can be taxed at rates up to 37%. This difference is why holding an investment longer can reduce what you owe.
Key Takeaways
- You only owe capital gains tax when you sell an investment; simply owning it and watching it grow costs you nothing in taxes.
- The holding period is measured from the date you bought to the date you sold, and you must hold for more than one year (not exactly one year) to get the lower long-term rate.
- Your long-term capital gains rate depends on your total income for the year: 0% if you're below a certain threshold, 15% for most people, or 20% if you're in the highest income bracket.
- The income thresholds that determine your rate change each year and are different for single filers, married couples, and heads of household.
How the holding period works
The IRS counts the holding period from the day after you buy an investment to the day you sell it. If you buy a stock on January 15 and sell it on January 15 of the next year, you have held it for exactly one year, which is not long enough. You must hold it until January 16 of the next year to meet the "more than one year" requirement. This matters because even one day short of the threshold bumps your gain into the short-term category and a much higher tax rate.
The holding period applies to each investment separately. You might hold one stock for three years (long-term) and another for six months (short-term). When you sell them, each is taxed according to its own holding period. You cannot mix them together or average them out.
The three long-term capital gains tax rates for 2024
Your long-term capital gains rate depends on your taxable income for the year, not on how much profit you made. The IRS sets income ranges for each rate, and these ranges change annually. For 2024, the ranges are:
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 | Up to $62,975 |
| 15% | $47,025 to $518,900 | $94,050 to $583,750 | $62,975 to $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
Your filing status matters. A married couple filing jointly can have nearly double the income of a single filer before hitting the 15% rate. These thresholds are adjusted each year for inflation, so the numbers will be different in 2025 and beyond.
Your taxable income includes wages, interest, dividends, and capital gains combined. If you earn $60,000 in wages and sell an investment for a $20,000 gain, your taxable income is $80,000. If you're single, that puts you in the 15% bracket, so you'd owe 15% on the $20,000 gain, not on the full $80,000.
How to calculate what you owe
Start by finding your total taxable income for the year, including all wages, interest, and other income. Then determine which tax bracket you fall into based on your filing status. The capital gains portion of your income is taxed at the rate for your bracket, not at a flat rate across all your income.
If you're single with $40,000 in wages and a $15,000 long-term capital gain, your taxable income is $55,000. You're in the 15% bracket (which starts at $47,025). The first $7,025 of your gain ($47,025 minus $40,000) is taxed at 0%, and the remaining $7,975 is taxed at 15%. You'd owe $1,196 in capital gains tax on that sale.
This stacking effect is why your other income matters. If you had $100,000 in wages instead, all $15,000 of your gain would be taxed at 15%, costing you $2,250. The same investment sold at the same profit costs you $1,054 more because of your other income.
The difference between long-term and short-term capital gains
Short-term capital gains are taxed as ordinary income at your regular tax bracket rate, which can be as high as 37%. Long-term capital gains are taxed at 0%, 15%, or 20%. For most people, this means long-term gains are taxed at roughly half the rate of short-term gains.
If you're in the 24% tax bracket and sell a stock you held for six months at a $10,000 profit, you owe $2,400. If you had held that same stock for 13 months and sold it at the same $10,000 profit, you'd owe $1,500 (at the 15% long-term rate). Waiting seven months saved you $900 in taxes on that single investment.
State and local taxes on capital gains
The federal long-term capital gains tax is separate from state and local taxes. Most states tax capital gains as ordinary income at their regular state income tax rate. A few states—including Washington, Tennessee, and Texas—do not tax capital gains at all. Others, like California, tax them at the same rate as wages.
Some states have recently introduced or are considering separate capital gains taxes. Washington state, for example, has a 7% capital gains tax on long-term gains over $250,000. Check your state's tax rules, because your total tax bill includes both federal and state taxes.
When you don't owe capital gains tax
You don't owe capital gains tax if you sell an investment for less than you paid for it. That's a capital loss. You can use capital losses to offset capital gains in the same year. If your losses exceed your gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year, and carry forward any remaining losses to future years.
You also don't owe tax on investments held until death. When you inherit an investment, its value is "stepped up" to the market price on the date of death. If your parent bought a stock for $10,000 and it was worth $50,000 when they died, you inherit it at $50,000. If you sell it immediately for $50,000, you owe no capital gains tax, even though it had gained $40,000 in value.
Frequently Asked Questions
Do I owe capital gains tax on my home when I sell it?
You may not. If you're single, you can exclude up to $250,000 of gain from the sale of a home you owned and lived in for at least two of the last five years. Married couples filing jointly can exclude up to $500,000. You only owe tax on any gain above that amount. Most home sales result in no capital gains tax.
What if I sell an investment at a loss?
You don't owe capital gains tax on a loss. You can use the loss to offset other capital gains in the same year. If losses exceed gains, you can deduct up to $3,000 against ordinary income and carry forward the rest to future years. This can reduce your overall tax bill.
How do I know if I held an investment long enough for the lower rate?
Count from the day after you bought it to the day you sold it. You need more than one year, so if you bought on March 1 and sold on March 1 of the next year, you're one day short. You must sell on March 2 or later. Your brokerage statement shows the purchase and sale dates, so you can verify the holding period there.
Can I reduce my capital gains tax by timing when I sell?
Yes, in some cases. If you're close to a higher tax bracket, selling in a year when your other income is lower might keep you in a lower bracket and reduce your rate. Similarly, realizing losses in the same year as gains can offset them. This is called tax-loss harvesting, and it's worth discussing with a tax professional if you have significant investments.
Are dividends taxed the same way as capital gains?
may have access to dividends from stocks are taxed at the same long-term capital gains rates (0%, 15%, or 20%), but ordinary dividends and interest are taxed as regular income. Your brokerage will tell you which dividends are may have access to. This is another reason holding investments longer can reduce your tax bill.