Capital gains tax is a tax on profit when you sell an investment or asset for more than you paid for it
The tax rate depends on how long you held the asset and how much total income you earned that year. The federal government taxes capital gains at three different rates: 0%, 15%, or 20%. Most people pay 15%. Which rate applies to you is determined by your tax bracket — the same income brackets used for regular wages, but the thresholds are different for capital gains.
You do not owe capital gains tax on assets you still own. The tax only applies when you sell. If you bought stock for $1,000 and it is now worth $5,000, you owe nothing until you sell it. Once you sell, the $4,000 profit is your capital gain.
Key Takeaways
- Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your income; short-term gains are taxed as ordinary income at rates up to 37%.
- The 0% rate applies to single filers earning under $47,025 in 2024; the 15% rate applies to most middle-income earners; the 20% rate applies to high earners.
- State and local taxes on capital gains vary widely — some states have no capital gains tax, while others tax it like regular income.
- You report capital gains on Schedule D of your tax return, and the IRS tracks your holding period automatically if you use a brokerage account.
Long-term versus short-term capital gains rates
The holding period matters. If you own an asset for more than one year before selling, it is a long-term capital gain. If you sell within one year, it is a short-term capital gain. The difference in tax rate is significant.
Long-term capital gains receive preferential rates: 0%, 15%, or 20%. Short-term capital gains are taxed as ordinary income, meaning they use the same brackets as wages — rates range from 10% to 37% depending on your total income for the year. This is why holding an investment for over a year often saves money in taxes.
The date that matters is the date you bought versus the date you sold. If you bought on January 15, 2023, and sold on January 16, 2024, it counts as long-term. If you sold on January 15, 2024, it is short-term.
Federal tax brackets for long-term capital gains in 2024
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 | Up to $62,700 |
| 15% | $47,025 to $518,900 | $94,050 to $583,750 | $62,700 to $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
These thresholds are adjusted each year for inflation. The brackets shown are for the 2024 tax year (filed in 2025). Your filing status — single, married filing jointly, head of household, or married filing separately — determines which column applies to you.
Your total income for the year determines which bracket you fall into. This includes wages, interest, dividends, and capital gains combined. If you are single and earned $40,000 in wages plus $10,000 in long-term capital gains, your total income is $50,000, which puts you in the 15% bracket for the capital gains portion.
State and local capital gains taxes
Most states do not have a separate capital gains tax. However, some states tax capital gains as regular income using their income tax brackets. A few states have recently created dedicated capital gains taxes that apply only to investment profits above a certain threshold.
California, for example, taxes capital gains as ordinary income at rates up to 13.3%. Washington state has a 7% tax on long-term capital gains over $250,000. New York taxes capital gains as regular income. If you live in a state with no income tax — such as Florida, Texas, or Wyoming — you owe no state capital gains tax.
Your state of residence when you sell is what matters, not where the investment is located. If you live in California and sell stock in a company headquartered in Texas, you still owe California tax on the gain.
How to report capital gains on your tax return
You report capital gains using Schedule D, which is part of Form 1040. On Schedule D, you list each sale separately: the date acquired, date sold, purchase price, and sale price. The form calculates your gain or loss automatically.
If you use a brokerage account — such as Fidelity, Vanguard, or Charles Schwab — the broker sends you a Form 1099-B after the year ends, which shows all your sales and holding periods. You use this form to fill out Schedule D. The IRS receives a copy of the 1099-B, so they know what you sold and when.
If you have losses on some investments, you can use those losses to offset gains. If your losses exceed your gains in a year, you can deduct up to $3,000 of the net loss against ordinary income. Any remaining loss carries forward to future years.
Special situations that affect capital gains tax
Inherited assets receive a step-up in basis. If your parent bought stock for $10,000 and it was worth $50,000 when they died, you inherit it at the $50,000 value. If you sell it immediately for $50,000, you owe no capital gains tax because your basis is $50,000. This applies to most inherited property, including real estate and investments.
Selling your primary home has a partial exclusion. If you are single and lived in the home for at least two of the last five years, you can exclude up to $250,000 of gain from tax. Married couples filing jointly can exclude up to $500,000. This exclusion applies once every two years.
Collectibles — such as art, coins, or precious metals — are taxed at a maximum rate of 28% on long-term gains, which is higher than the standard 20% rate. Cryptocurrency is treated as property, so gains are taxed as capital gains.
Frequently Asked Questions
Do I owe capital gains tax if I sell at a loss?
No, you do not owe tax on a loss. Instead, you can use the loss to reduce taxes on other gains or income. If you sell stock you bought for $5,000 for $3,000, you have a $2,000 loss that offsets other gains or up to $3,000 of ordinary income in that year.
What if I day trade and buy and sell stocks constantly?
Each sale is a separate short-term capital gain or loss, taxed as ordinary income. If you trade frequently enough that it is your primary business, the IRS may classify you as a professional trader, which changes how you report income. Consult a tax professional if this applies to you.
Do I have to pay capital gains tax the year I sell, or can I pay it later?
You report the gain on your tax return for the year you sold the asset, and you pay the tax by the return deadline — usually April 15 of the following year. You cannot defer payment to a later year unless you use an installment sale or a like-kind exchange, which have specific rules.
How do I know my cost basis if I lost the original purchase records?
Your brokerage can provide historical records going back several years. If records are truly unavailable, you can estimate based on the stock price on the date of purchase using historical price databases. The IRS expects you to make a reasonable effort; keep whatever documentation you have.
Are dividends taxed the same way as capital gains?
may have access to dividends are taxed at the same long-term capital gains rates (0%, 15%, or 20%). Non-may have access to dividends are taxed as ordinary income. Most dividends from U.S. stocks and mutual funds are may have access to if you held the stock for at least 60 days around the dividend date.