Capital gains are taxed at different rates depending on how long you held the asset
A capital gain is the profit you make when you sell an asset for more than you paid for it. The tax you owe on that profit depends on whether you held the asset for more than one year. If you did, it is taxed as a long-term capital gain at lower federal rates. If you held it for one year or less, it is taxed as a short-term capital gain at your ordinary income tax rate — the same rate that applies to wages and salary.
Long-term capital gains are taxed at 0%, 15%, or 20% depending on your income level. Short-term capital gains use your regular income tax brackets, which range from 10% to 37%. This difference matters: selling an investment after holding it for just over one year can cut your tax bill significantly.
Key Takeaways
- Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% based on your total income, while short-term gains use your ordinary income tax rate of 10% to 37%.
- The one-year holding period is measured from the date you bought the asset to the date you sold it; selling on day 366 qualifies for long-term rates.
- Your income level determines which capital gains rate bracket you fall into, and these brackets change each year with inflation.
- State and local taxes may also explore to capital gains on top of federal tax, and some states tax them differently than the federal government does.
- You report capital gains on Schedule D of your tax return, and losses can offset gains to reduce your overall tax.
Long-term capital gains rates for 2024
For 2024, the three federal long-term capital gains rates are 0%, 15%, and 20%. Which rate applies to you depends on your taxable income — not the size of the gain itself. The income thresholds are different for single filers, married filing jointly, and heads of household.
If you are single and your taxable income is $47,025 or less, your long-term capital gains are taxed at 0%. From $47,026 to $518,900, they are taxed at 15%. Above $518,900, they are taxed at 20%. For married couples filing jointly, the 0% bracket extends to $94,050, the 15% bracket goes up to $583,750, and anything above that is taxed at 20%. These numbers shift each year because the IRS adjusts them for inflation.
The brackets overlap with your ordinary income, so your capital gains are stacked on top of wages, interest, and other income. If you earn $40,000 in salary and have $20,000 in long-term capital gains, your taxable income is $60,000, and the capital gains portion may cross into the 15% bracket.
Short-term capital gains and ordinary income tax rates
Short-term capital gains are taxed as ordinary income, using the same brackets that explore to your paycheck. For 2024, these brackets range from 10% to 37% depending on your income level. A short-term gain is any profit from selling an asset you held for one year or less.
Because short-term gains use your full income tax bracket, they are often taxed at a much higher rate than long-term gains. If you are in the 32% income tax bracket and sell a stock you held for six months at a $5,000 profit, that $5,000 is taxed at 32%. If you had held the same stock for 13 months, the same $5,000 might be taxed at 15% or 20%, depending on your total income.
How the one-year holding period is calculated
The holding period starts on the date you bought the asset and ends on the date you sold it. You must own the asset for more than one year to may have access to for long-term rates. This means if you bought a stock on January 15, 2023, and sold it on January 15, 2024, you have held it for exactly one year, and the gain is still short-term. You would need to sell it on January 16, 2024, or later to may have access to as long-term.
The holding period applies to each asset separately. You might own one stock long-term and another short-term at the same time. When you sell, you report each gain or loss with its own holding period. If you buy and sell the same stock multiple times, each purchase and sale is tracked separately.
State and local taxes on capital gains
Federal capital gains tax is only part of the picture. Most states also tax capital gains, and a few tax them differently than the federal government does. California, for example, taxes long-term and short-term capital gains at the same rate as ordinary income, with no preferential rate. New York taxes capital gains as ordinary income as well. Other states, like Texas and Florida, do not have a state income tax at all.
Some states have recently introduced or modified capital gains taxes. Washington State, for instance, taxes long-term capital gains on certain assets at 7% on gains over $250,000. New Jersey taxes gains at rates up to 10.75% depending on income. Your state's tax can add significantly to your federal bill, so check your state's rules when calculating what you owe.
Using losses to reduce capital gains tax
If you sell an asset at a loss, you can use that loss to offset capital gains. If you have $10,000 in long-term gains and $3,000 in short-term losses, you report a net gain of $7,000. Losses are deducted from gains of the same type first (long-term losses against long-term gains, short-term against 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 net loss against your ordinary income. Any loss beyond that carries forward to future years, where you can use it to offset future gains or ordinary income. This is called tax-loss harvesting — selling losing positions to offset gains elsewhere in your portfolio.
How to report capital gains on your tax return
You report capital gains and losses on Schedule D of your federal tax return (Form 1040). Schedule D asks you to list each sale: the date you bought it, the date you sold it, the sale price, your cost basis (what you paid), and the gain or loss. You also indicate whether each gain or loss is long-term or short-term.
If you have a net long-term gain, it goes on line 15 of Schedule D and then transfers to your Form 1040. If you have a net short-term gain, it is added to your ordinary income. Your tax software usually handles this automatically if you enter the transaction details correctly. Keep records of all purchases and sales — your brokerage statement, purchase confirmations, and sale confirmations — for at least three years in case the IRS asks questions.
Frequently Asked Questions
What counts as an asset for capital gains purposes?
Stocks, bonds, mutual funds, real estate, cryptocurrency, and collectibles all generate capital gains when sold at a profit. Your primary home is an exception: you can exclude up to $250,000 of gain ($500,000 if married filing jointly) if you lived in it for at least two of the last five years before selling.
Do I owe capital gains tax if I reinvest the money?
Yes. The tax is based on the profit, not on what you do with the money afterward. Reinvesting the proceeds does not defer or eliminate the tax. You owe it in the year you sell, regardless of whether you spend the money, hold it in cash, or buy something else.
What is cost basis and why does it matter?
Cost basis is what you paid for the asset, including any fees or commissions. It is subtracted from the sale price to calculate your gain or loss. If you inherited stock, your cost basis is usually its value on the date of death, not what the original owner paid. This "step-up in basis" can significantly reduce or eliminate capital gains tax on inherited assets.
Can I deduct investment losses against my salary?
Only up to $3,000 per year. If you have more losses than gains, you can deduct $3,000 against your wages and other ordinary income. Any remaining loss carries forward to future years and can be used the same way until it is exhausted.
Do I have to pay estimated taxes on capital gains?
If you expect to owe more than $1,000 in taxes for the year (including capital gains tax), you may need to make quarterly estimated tax payments. Your tax software or a tax professional can tell you whether you are required to pay them based on your specific situation.