The long-term capital gains tax rate depends on your income level, not on how much profit you made

Long-term capital gains are profits you make when you sell an investment you've held for more than one year. The federal tax rate on these gains is 0%, 15%, or 20% — which rate you pay depends entirely on your total taxable income for the year, not on the size of the gain itself. This is different from short-term gains (investments held one year or less), which are taxed as ordinary income at your regular tax bracket.

The income thresholds that determine which rate applies change every year because they're adjusted for inflation. For 2024, the 0% rate applies to single filers with taxable income up to $47,025, the 15% rate applies from $47,026 to $518,900, and the 20% rate applies to income above that. If you're married filing jointly, those thresholds are higher. These numbers shift annually, so the rate you paid last year may not be the rate you pay this year.

Key Takeaways

  • Long-term capital gains are taxed at 0%, 15%, or 20% based on your total taxable income for the year, not the size of your profit.
  • You must hold an investment for more than one year for the gain to may have access to as long-term; anything less is taxed as ordinary income at your regular rate.
  • The income thresholds that determine your rate change every year and vary depending on whether you file as single, married, or head of household.
  • State and local taxes on capital gains apply on top of the federal rate and vary widely by location.

How the three federal tax brackets work

The 0% bracket is the lowest tier. If your total taxable income for the year falls within this range, you owe no federal tax on long-term capital gains. This bracket is often used by people with low overall income, retirees who have little income beyond Social Security, or people who had a large loss in another investment that offset their gains.

The 15% bracket is the middle tier and covers most people who sell investments at a profit. Your gain is taxed at 15% if your taxable income falls within this range. Many people end up here because they have wages, self-employment income, or retirement distributions that push them into this bracket even if their capital gain itself is small.

The 20% bracket applies to high-income filers. Once your taxable income exceeds the threshold for your filing status, any long-term capital gains above that point are taxed at 20%. High earners often pay this rate on at least part of their gains.

How to know which rate applies to you

Your tax bracket for capital gains is determined by adding all your income together — wages, self-employment income, retirement distributions, interest, dividends, and the capital gain itself — then comparing that total to the year's thresholds. You don't pay the rate on just the gain; you pay it on the gain only if your total income pushes you into that bracket.

Example: You're single and earned $40,000 in wages. You sold stock and made a $10,000 gain. Your total taxable income is $50,000. For 2024, the 0% bracket ends at $47,025, so $2,975 of your gain is taxed at 0% and the remaining $7,025 is taxed at 15%. You don't pay 15% on the whole gain.

The order in which income is stacked matters. Long-term capital gains are considered last, after all other income is counted. This means if you have a large year of wages or self-employment income, your capital gains may be pushed into a higher bracket than they would be in a lower-income year.

State and local taxes on capital gains

Most states tax capital gains as part of ordinary income using their own tax rates, which range from 0% (in states with no income tax) to over 13% in high-tax states. A few states — California, New York, Illinois, and Washington — have enacted or are considering separate capital gains taxes that apply on top of income tax. These additional taxes typically apply only to gains above a certain threshold, often $250,000 or more.

Your total tax bill on a capital gain includes both the federal rate and your state's rate. Someone in California selling a large investment may owe 20% federal plus California's income tax plus California's capital gains tax, totaling well over 30%. Someone in a no-income-tax state pays only the federal rate.

The difference between long-term and short-term gains

The holding period is the only thing that matters. If you buy a stock on January 15 and sell it on January 16 of the next year, it's long-term. If you sell it on January 15 of the next year, it's short-term. The IRS counts the day you buy as day zero; the holding period starts the day after you purchase.

Short-term gains are taxed as ordinary income at your regular tax bracket, which can be as high as 37% federally. This is much higher than the 20% maximum on long-term gains. Because of this, investors often try to hold investments for at least one year to may have access to for the lower rate. Short-term losses can offset short-term gains dollar-for-dollar, and any remaining loss can offset long-term gains or up to $3,000 of ordinary income per year.

How capital losses reduce your tax bill

If you sell an investment at a loss, you can use that loss to reduce your capital gains. If you have $15,000 in long-term gains and $5,000 in long-term losses, your net gain is $10,000, and that's what you pay tax on. Losses are subtracted from gains of the same type first (long-term from long-term, short-term from short-term), then any remaining loss can offset the other type.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against your ordinary income (wages, salary, interest, and so on). Any loss beyond that $3,000 carries forward to future years and can be used to offset future gains or ordinary income, with the same $3,000-per-year limit. This carryforward continues indefinitely until the loss is fully used.

Special situations that affect your rate

Net Investment Income Tax (NIIT) is an additional 3.8% tax that applies to certain investment income if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). This tax applies to long-term capital gains, dividends, interest, and rental income. It's calculated separately from your regular income tax and is added on top of it.

Collectibles and certain real estate sales have their own rules. Gains on collectibles (art, coins, stamps) are taxed at a maximum of 28%, not 20%, even if they're long-term. Gains on the sale of a primary residence may be excluded entirely if you meet the ownership and use tests — up to $250,000 for single filers or $500,000 for married couples. Depreciation recapture on rental property is taxed at 25%.

Frequently Asked Questions

Do I have to report a capital gain if I didn't make much money?

Yes. You report all capital gains on your tax return, even if you owe no tax on them. If your total income is low enough to fall in the 0% bracket, you'll owe no federal tax, but the gain still goes on your return. Some states may require reporting even if you owe no federal tax.

What if I sold an investment at a loss — do I have to report that?

Yes. Capital losses must be reported on your tax return so you can use them to offset gains or ordinary income. Even if you have no gains to offset, reporting the loss allows you to carry it forward to future years.

Can I choose which shares to sell to lower my tax bill?

Yes, if you bought the same stock or fund at different times and prices. You can specify which shares you're selling (specific identification method) to minimize your gain or maximize your loss. Your broker needs written instructions, and you must keep records of which shares you identified. Without specific identification, most brokers use first-in-first-out (FIFO), which may not be the most tax-efficient method.

Does the rate change if I'm retired or on Social Security?

No. The rate depends only on your total taxable income for the year, not your age or income source. However, Social Security benefits may push you into a higher bracket, and some retirement distributions count as ordinary income, which can push your capital gains into the 15% or 20% bracket.

What happens if I inherit an investment — do I owe capital gains tax?

No tax is owed on the inheritance itself. Inherited investments receive a "step-up in basis," meaning the cost basis is reset to the value on the date of death. If you sell the investment shortly after inheriting it, you typically owe little to no capital gains tax because your gain is calculated from the stepped-up basis, not the original purchase price.