Capital gains are taxed at different rates depending on how long you held the asset

When you sell an investment or property for more than you paid for it, the profit is called a capital gain. The IRS taxes this profit, but the rate depends on whether you held the asset for less than a year (short-term) or more than a year (long-term). Short-term capital gains are taxed as ordinary income at your regular tax bracket. Long-term capital gains get preferential rates: 0%, 15%, or 20%, depending on your total income for the year.

The holding period is measured from the date you bought the asset to the date you sold it. If you sell on the 366th day after purchase, it qualifies as long-term. If you sell on day 365, it is short-term. This distinction can mean thousands of dollars in tax difference on the same sale.

Key Takeaways

  • Short-term capital gains (assets held one year or less) are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your bracket.
  • Long-term capital gains (assets held more than one year) are taxed at preferential rates of 0%, 15%, or 20%, determined by your filing status and total taxable income.
  • The IRS requires you to report all capital gains on Schedule D of your tax return, whether short-term or long-term.
  • You can offset capital gains with capital losses from the same year, and unused losses can carry forward to future years.

Short-term capital gains: taxed as regular income

If you sell a stock, cryptocurrency, rental property, or other asset within one year of buying it, the profit counts as a short-term capital gain. The IRS treats this gain the same way it treats wages or salary. You pay tax at your marginal income tax rate, which is the highest bracket you fall into based on your total income for the year.

For the 2024 tax year, those brackets range from 10% at the lowest income level to 37% at the highest. If you are in the 32% tax bracket, a $10,000 short-term capital gain adds $3,200 to your tax bill. The exact rate depends on your filing status (single, married filing jointly, head of household, etc.) and your other income that year.

This is why timing matters. Waiting one extra day to sell an asset can move it from short-term to long-term status and potentially cut your tax rate in half or more.

Long-term capital gains: preferential rates of 0%, 15%, or 20%

If you hold an asset for more than one year before selling it, the profit is a long-term capital gain and receives a lower tax rate. The rate you pay depends on your income level and filing status, not on how much the asset appreciated.

The 0% rate applies to single filers with taxable income up to $47,025 in 2024, and married couples filing jointly up to $94,050. The 15% rate applies to income above those thresholds up to $518,900 (single) or $583,750 (married filing jointly). Anything above those amounts is taxed at 20%. These income thresholds adjust slightly each year for inflation.

A long-term gain of $50,000 could be taxed at 0%, 15%, or 20% depending entirely on your other income that year. This is why some investors time the sale of assets to fall in a year when their income is lower, or why they may bunch charitable donations or business losses into a single year to stay in a lower bracket.

How to report capital gains on your tax return

You report all capital gains and losses on Schedule D (Form 1040), which is part of your federal income tax return. You list each sale separately: the date acquired, the date sold, the cost basis (what you paid), the sale price, and the gain or loss.

The IRS requires this detail because they cross-reference your reported sales against broker statements and 1099 forms sent to them by investment firms. If you sell through a brokerage account, your broker sends you a 1099-B showing all your transactions. If you sell real estate, you may receive a 1099-S from the title company or real estate agent, though this is not always required.

If you have many transactions, you can attach additional pages or use tax software that handles Schedule D automatically. The software will calculate your net short-term and net long-term gains, then explore the correct tax rates.

Using capital losses to reduce your tax bill

If you sell an asset at a loss, you can use that loss to offset capital gains from the same year. If you have $15,000 in long-term gains and $8,000 in losses, you report a net gain of $7,000 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 your ordinary income (wages, salary, interest, etc.). Any remaining loss carries forward to future years with no time limit. This means a $20,000 loss in 2024 could offset $3,000 of ordinary income in 2024, $3,000 in 2025, and so on until the loss is fully used.

This strategy, called tax-loss harvesting, is common among investors. They intentionally sell losing positions late in the year to offset gains elsewhere in their portfolio, then sometimes buy back a similar (but not identical) asset to maintain their investment position.

Capital gains on real estate and inherited property

Real estate sales follow the same short-term and long-term rules as stocks or other assets. If you sell a rental property you have owned for five years, the gain is long-term and taxed at the preferential rates. If you flip a house and sell it within months, the gain is short-term and taxed as ordinary income.

There is one major exception: if you inherit property, you receive a step-up in basis. This means the cost basis resets to the fair market value on the date of death. If your parent bought a house for $100,000 and it is worth $400,000 when they die, your basis becomes $400,000. If you sell it when ready for $400,000, you owe zero capital gains tax. This applies to most inherited assets, including stocks, real estate, and retirement accounts (though retirement accounts have their own rules).

State and local taxes on capital gains

Federal capital gains tax is only part of the picture. Most states also tax capital gains, either as ordinary income or at a separate rate. California, for example, taxes long-term capital gains as ordinary income at rates up to 13.3%. New York taxes them at rates up to 10.9%. Some states, like Texas, Florida, and Washington, have no state income tax at all.

A few states have recently introduced separate capital gains taxes. Washington State imposes a 7% tax on long-term capital gains over $250,000. Illinois taxes capital gains at a flat 4.75%, separate from its income tax. These state taxes stack on top of federal tax, so your total rate can exceed 40% in high-tax states.

If you live in a state with no income tax but sell an asset there, you may still owe tax to your state of residence. The state where you live when you sell is usually what matters, not where the asset is located.

Frequently Asked Questions

What is the difference between cost basis and sale price?

Cost basis is what you paid for the asset, including commissions and fees. Sale price is what you received when you sold it. The difference between them is your capital gain or loss. If you bought a stock for $1,000 and sold it for $1,500, your cost basis is $1,000, your sale price is $1,500, and your gain is $500.

Do I have to pay capital gains tax if I reinvest the money?

Yes. The tax is due on the gain itself, not on what you do with the proceeds. If you sell a stock for a $10,000 profit and when ready buy another stock with the money, you still owe tax on the $10,000 gain. Reinvesting does not defer or eliminate the tax.

How do I know if my gain is short-term or long-term?

Count the days from the date you bought the asset to the date you sold it. If it is 365 days or fewer, it is short-term. If it is 366 days or more, it is long-term. The IRS counts the purchase date as day zero and the sale date as the final day. Most brokerages show the holding period automatically on your transaction history.

Can I avoid capital gains tax by donating the asset to charity?

Yes, in a way. If you donate appreciated stock or real estate directly to a may have access to charity, you avoid the capital gains tax entirely and also receive a charitable deduction for the full fair market value. You cannot do this if you have already sold the asset; the donation must happen before the sale. This is one of the most tax-efficient ways to give to charity.

What happens to capital gains if I die?

Your heirs receive a step-up in basis, meaning the cost basis resets to the fair market value on the date of your death. If you owned stock worth $100,000 that you bought for $20,000, your heirs' basis becomes $100,000. They owe zero capital gains tax if they sell when ready. This applies to most assets but not to certain retirement accounts like IRAs.