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, or piece of land — and later sell it for a higher price, the profit is called a capital gain. The government taxes that profit. How much you owe depends on how long you held the asset and your total income for the year. The tax rate ranges from 0% to 20% for most people, though some higher earners pay more.

Capital gains tax is separate from income tax on wages or salary. You might owe nothing on your job income but still owe capital gains tax on an investment sale. The two are calculated differently and taxed at different rates.

Key Takeaways

  • Capital gains are the profit you make when you sell an asset for more than you paid for it, and that profit is taxable income.
  • Long-term capital gains (assets held over one year) are taxed at lower rates — 0%, 15%, or 20% — depending on your income bracket.
  • Short-term capital gains (assets held one year or less) are taxed as ordinary income at your regular tax rate, which can be much higher.
  • You report capital gains on Schedule D of your tax return, and the IRS matches sales records from your broker or the person who bought from you.

Long-term versus short-term capital gains rates

The IRS taxes capital gains differently depending on how long you owned the asset. If you held it for more than one year, it is a long-term capital gain and gets a lower tax rate. If you held it for one year or less, it is a short-term capital gain and is taxed at your ordinary income tax rate — the same rate as your salary.

Long-term capital gains rates for 2024 are 0%, 15%, or 20%, depending on your income. The exact rate depends on your filing status and total taxable income for the year. Short-term capital gains have no special rate; they are added to your wages and taxed at whatever bracket you fall into, which can be 10%, 12%, 22%, 24%, 32%, 35%, or 37%.

This difference matters enormously. Selling a stock you held for two years might cost you 15% in tax. Selling the same stock after holding it for six months might cost you 24% or more, depending on your income.

How the IRS knows about your sales

When you sell stocks, bonds, or other securities through a broker, the broker sends a form called a 1099-B to both you and the IRS. When you sell real estate, the title company or closing agent sends a form called a 1099-S. These forms report the sale price and, in many cases, what you originally paid for the asset.

The IRS receives copies of these forms and matches them against your tax return. If you report a different gain or loss than the broker reported, the IRS will flag it. You do not have to report a sale if you did not make a profit, but you must report it if you did — even if you do not owe tax on it (for example, if your long-term gain falls in the 0% bracket).

If you sell something privately — a car, jewelry, or a house to a family member — and no broker is involved, you still owe tax on any gain. The IRS may not know about it immediately, but you are required to report it on your return.

What counts as a capital asset

Capital gains tax applies to most things you own and sell for a profit: stocks, bonds, mutual funds, real estate, cryptocurrency, collectibles, and business assets. The rules are the same whether you bought the asset as an investment or for personal use.

There are exceptions. If you sell your primary home, you can exclude up to $250,000 of gain if you are single, or $500,000 if you are married filing jointly — but only if you owned and lived in the home for at least two of the last five years. If you sell a rental property or investment home, you do not get this exclusion and owe tax on the full gain.

Losses also matter. If you sell an asset for less than you paid, you have a capital loss. You can use capital losses to offset capital gains, and if your losses exceed your gains, you can deduct up to $3,000 of the excess loss against ordinary income in a single year. Any remaining loss carries forward to future years.

How to calculate your capital gain or loss

The calculation is straightforward: sale price minus what you paid equals your gain or loss. But "what you paid" includes more than just the purchase price. It includes commissions, fees, and improvements you made to the asset.

If you bought 100 shares of stock for $50 per share and paid a $10 commission, your cost basis is $5,010 (5,000 + 10). If you later sell those shares for $60 per share and pay another $10 commission, your proceeds are $5,990 (6,000 − 10). Your gain is $980 (5,990 − 5,010).

For real estate, improvements like a new roof or kitchen renovation add to your cost basis. Repairs and maintenance do not. If you inherited an asset, your cost basis is usually the value on the date of death, not what the original owner paid — this is called a step-up in basis and can save you significant tax.

Reporting capital gains on your tax return

You report capital gains on Schedule D of Form 1040, your main tax return. You list each sale separately: the date you bought it, the date you sold it, the sale price, your cost basis, and your gain or loss. The form automatically sorts your sales into long-term and short-term, calculates your totals, and tells you where to enter the result on your main return.

If you have only one or two simple sales, the form is straightforward. If you have many sales or complex transactions, you may need to attach additional schedules or work with a tax preparer. Brokers often provide a summary that makes the process easier.

You must file Schedule D even if you have no tax liability — for example, if your long-term gains fall entirely in the 0% bracket. Filing shows the IRS you reported the sale and prevents a mismatch notice later.

Special situations: inherited assets and gifts

If you inherit an asset, you do not owe capital gains tax on the increase in value that happened while the previous owner held it. Instead, your cost basis is stepped up to the fair market value on the date of death. If you then sell the inherited asset, you only owe tax on gains that happen after you inherit it.

If someone gives you an asset as a gift, you inherit their cost basis, not a stepped-up basis. If they bought stock for $1,000 and gave it to you when it was worth $5,000, your cost basis is $1,000. If you later sell it for $8,000, you owe tax on $7,000 of gain, not $3,000.

These rules can have large tax consequences. If you are considering giving or inheriting significant assets, it is worth understanding how basis works before the transaction happens.

Frequently Asked Questions

Do I owe capital gains tax if I sell at a loss?

No, you do not owe tax on a loss. You can use the loss to reduce capital gains from other sales in the same year. If losses exceed gains, you can deduct up to $3,000 against ordinary income, and carry the rest forward to future years.

What if I day-trade stocks — do I pay short-term rates?

Yes. Any gain on a stock you hold for one year or less is taxed as short-term capital gain at your ordinary income rate. Day traders often pay 24% to 37% on their profits. The IRS does not treat frequent trading differently unless you are a professional trader, which has specific legal definitions.

Is cryptocurrency taxed the same way as stocks?

Yes. When you sell cryptocurrency for a profit, it is a capital gain. If you held it over one year, it gets long-term rates. If under one year, it is taxed as short-term gain. Mining and staking rewards are taxed as ordinary income when received, not as capital gains.

Can I deduct investment losses against my salary or wages?

Only up to $3,000 per year. If you have $10,000 in capital losses and no capital gains, you can deduct $3,000 against your wages or other income. The remaining $7,000 carries forward to future years, where you can deduct another $3,000 per year until it is used up.

What happens if I do not report a capital gain the IRS knows about?

The IRS will send you a notice showing a mismatch between what the broker reported and what you reported. You will owe the unpaid tax plus interest and penalties. It is better to report the gain and pay the tax than to ignore the notice.