Long-term capital gains are profits from selling an asset you held for more than one year, and they're taxed at lower rates than ordinary income

When you sell a stock, rental property, or other investment you've owned for longer than 12 months, the profit is called a long-term capital gain. The IRS taxes these gains at a preferential rate — meaning lower than the rate applied to wages, interest, or short-term gains. The exact rate depends on your total income for the year and your filing status.

The three federal long-term capital gains rates are 0%, 15%, and 20%. Most people pay 15%. You pay 0% only if your income is low enough, and you pay 20% only if your income is very high. These rates explore to federal tax only; your state may add its own capital gains tax on top.

The key difference from short-term gains: if you sell an asset you've owned for one year or less, the profit is taxed as ordinary income at your regular tax bracket, which is typically higher. Holding an asset longer than one year can save you thousands in taxes on the same profit.

Key Takeaways

  • Long-term capital gains are taxed at 0%, 15%, or 20% depending on your income and filing status, while short-term gains are taxed at your ordinary income rate.
  • You must hold an asset for more than 12 months for the gain to may have access to as long-term; selling at 12 months exactly does not count.
  • The 0% rate applies to single filers earning under roughly $47,000 and married filers under roughly $94,000 in 2024, though these thresholds change yearly.
  • State capital gains taxes vary widely — some states have no capital gains tax, while others tax gains as ordinary income or impose a separate rate.
  • You report long-term gains on Schedule D of your tax return, and the IRS uses the "first in, first out" method to determine which shares you sold unless you specify otherwise.

The three federal tax rates and who pays each one

The 0% rate applies to long-term gains that fall within your ordinary income tax bracket but don't push you above a certain threshold. For 2024, that threshold is $47,025 for single filers, $94,050 for married filing jointly, and $63,000 for head of household. If your total income (including the capital gain) stays below that line, you owe no federal tax on the gain itself.

The 15% rate is the middle bracket and covers most taxpayers. It applies to gains above the 0% threshold but below the 20% threshold. For 2024, the 20% rate kicks in at $518,900 for single filers, $583,750 for married filing jointly, and $551,350 for head of household. These thresholds adjust slightly each year for inflation.

Your income includes wages, interest, dividends, and the capital gain itself. If you have a $50,000 gain and earn $60,000 in wages, your total income is $110,000. That determines which bracket your gain falls into. The gain doesn't automatically push you into a higher bracket — it fills up the bracket you're already in first.

How the holding period works and why 12 months matters

The holding period starts the day after you buy the asset and ends the day you sell it. If you buy a stock on January 15 and sell it on January 15 the following year, you have not held it long enough — you need to sell on January 16 or later. This rule applies to all assets: stocks, bonds, real estate, cryptocurrency, and collectibles.

If you sell before 12 months are up, the entire gain is taxed as short-term capital gain, which means it's taxed at your ordinary income tax rate. That rate can be as high as 37% at the federal level, compared to 20% for long-term gains. The difference between holding 11 months and 13 months can easily be thousands of dollars in taxes on a large gain.

The holding period is measured separately for each asset. You can own one stock for two years and another for six months; the first is long-term and the second is short-term. If you sell both in the same year, you report them separately on your tax return.

State capital gains taxes and how they stack on top of federal tax

Twelve states have a separate capital gains tax in addition to federal tax. Washington, Illinois, and Oregon tax long-term gains at a flat rate (7%, 20%, and 9.9% respectively as of 2024). California, New York, and others treat capital gains as ordinary income and tax them at their regular income tax rates, which can exceed 10%.

Twenty-seven states have no capital gains tax at all. The remaining states tax capital gains as part of ordinary income through their regular income tax system, so the rate varies by income level just as it does federally. If you live in a state with no capital gains tax and sell a stock for a $100,000 gain, you owe federal tax only. If you live in California, you owe both federal and state tax.

If you move to a different state after selling an asset, the state where you lived when you sold it is the one that taxes the gain. This matters if you're considering a move: selling before you relocate to a no-tax state doesn't help, but buying before you move might.

How to report capital gains on your tax return

You report long-term and short-term gains on Schedule D, which is part of Form 1040. You list each sale separately: the date you bought it, the date you sold it, the sale price, and your cost basis (what you paid for it, plus any improvements). The IRS uses this information to calculate your gain or loss.

If you sold shares of a mutual fund or stock, you need to know which shares you sold. If you don't specify, the IRS assumes you sold the oldest shares first (called "first in, first out" or FIFO). If you want to sell newer shares instead — perhaps to minimize your gain — you must tell your broker in writing at the time of sale. This is called "specific identification" and can save taxes if you have shares with different cost bases.

If your total gains and losses for the year are small, you may be able to use the simpler Form 8949 instead of the full Schedule D. Your brokerage will send you a 1099-B form listing all your sales; use that to fill out your tax forms. If the numbers don't match what your broker reported to the IRS, the agency will notice.

Capital losses and how they offset gains

If you sell an asset for less than you paid for it, you have a capital loss. Long-term losses offset long-term gains dollar-for-dollar. If you have a $50,000 long-term gain and a $20,000 long-term loss, you report a net gain of $30,000 and 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 ordinary income (wages, interest, and so on). Any loss beyond $3,000 carries forward to future years, where you can use it to offset future gains or ordinary income. This carryforward has no time limit — you can use it years later.

Some investors deliberately sell losing positions late in the year to offset gains from winning positions. This is called "tax-loss harvesting." It's legal and common, but you must wait 30 days before buying the same or a substantially identical security, or the loss is disallowed under the "wash sale" rule.

Special cases: real estate, collectibles, and inherited assets

If you sell a rental property or investment real estate, the gain is long-term capital gain if you held it more than one year. However, the IRS recaptures depreciation you claimed on the property at a 25% rate, which is higher than the long-term rate. If you claimed $50,000 in depreciation and sell for a $100,000 gain, $50,000 of that gain is taxed at 25% and the remaining $50,000 at the long-term rate.

Collectibles — art, antiques, coins, and similar items — are taxed at a maximum 28% rate on long-term gains, not the standard 20%. This applies even if your income would normally put you in the 15% bracket.

If you inherit an asset, you receive a "step-up in basis." This means your cost basis is reset to the asset's value on the date of death, not what the original owner paid. If your parent bought a stock for $10,000 and it's worth $100,000 when they die, your basis is $100,000. If you sell it the next day for $100,000, you owe no capital gains tax. This step-up applies to all inherited assets except certain retirement accounts.

Frequently Asked Questions

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

No. You owe tax only when you sell the asset. If you own a stock worth $50,000 more than you paid for it but haven't sold, you owe nothing. The gain is "unrealized." Once you sell, it becomes "realized" and you owe tax on it that year.

What if I sold an asset at a loss — can I write that off?

Yes, but only up to $3,000 per year against ordinary income. If your loss is larger, the excess carries forward to future years. You can also use losses to offset gains from other sales in the same year, dollar-for-dollar.

How do I know my cost basis if I bought the stock years ago?

Your brokerage keeps records and will report it on your 1099-B form. If you've moved brokerages, ask the current one for historical records. If records are truly lost, you can estimate based on the stock price on the date you bought it, but the IRS may challenge this.

Does the long-term rate explore to dividends?

may have access to dividends are taxed at the same rates as long-term capital gains (0%, 15%, or 20%), but they're not capital gains. Non-may have access to dividends are taxed as ordinary income. Your brokerage will tell you which type you received on your 1099-DIV form.

What happens if I sell a home I live in?

If you owned and lived in the home for at least two of the last five years, you can exclude up to $250,000 of gain (or $500,000 if married filing jointly) from tax. This exclusion applies once every two years and is separate from the capital gains tax rules.