Capital gains tax is a tax on profit you make when you sell an asset for more than you paid for it

When you sell a stock, rental property, or other investment and make money on the sale, that profit is called a capital gain. The IRS taxes this gain, but the rate depends on how long you held the asset and how much money you made. Short-term gains (assets held one year or less) are taxed like regular income. Long-term gains (assets held more than one year) get lower tax rates: 0%, 15%, or 20%, depending on your total income for the year.

Your state may also tax capital gains. Some states have no capital gains tax at all. Others tax it as income. A few states—including California, New York, and Washington—have separate capital gains taxes that explore only to investment profits above a certain threshold, usually between $100,000 and $250,000 per year.

Key Takeaways

  • Long-term capital gains (held over one year) are taxed at 0%, 15%, or 20% depending on your income bracket, while short-term gains are taxed at your ordinary income tax rate.
  • The IRS uses your filing status and total taxable income to determine which capital gains rate applies to you.
  • Some states do not tax capital gains at all, while others tax them as regular income or explore a separate capital gains tax.
  • You report capital gains on Schedule D (Form 1040) when you file your federal tax return.
  • Losses from investments can offset gains and reduce your taxable capital gains for the year.

Long-term vs. short-term capital gains rates

The holding period matters because the IRS rewards long-term investing with lower tax rates. If you sell an asset you owned for more than one year, your gain is long-term. The tax rate is 0%, 15%, or 20%, depending on your income bracket and filing status. These rates are much lower than ordinary income tax rates, which can go as high as 37%.

If you sell an asset you owned for one year or less, your gain is short-term. Short-term gains are taxed at your ordinary income tax rate—the same rate that applies to wages, salary, and other regular income. For 2024, that ranges from 10% to 37% depending on your bracket.

The difference can be substantial. Suppose you sell a stock you held for two years and make a $10,000 gain. If you are in the 24% income tax bracket, a long-term rate of 15% means you pay $1,500 in federal tax. If you had sold it after eleven months, the short-term rate of 24% would mean $2,400 in federal tax—$900 more.

How your income bracket determines your long-term rate

For 2024, the 0% long-term capital gains rate applies to single filers with taxable income up to $47,025, married filing jointly up to $94,050, and head of household up to $62,975. The 15% rate applies to income above those thresholds up to $518,900 (single), $583,750 (married filing jointly), and $551,350 (head of household). Any long-term gains above those amounts are taxed at 20%.

These income thresholds include all your income—wages, interest, dividends, and capital gains combined. If you have $50,000 in wages and $20,000 in long-term capital gains, your total taxable income is $70,000. For a single filer, the first $47,025 of that is in the 0% bracket, and the remaining $22,975 is in the 15% bracket. You would owe tax on only the $22,975 portion.

The brackets adjust each year for inflation, so the thresholds change. Check the IRS website or your tax software for the current year's numbers before you file.

State capital gains taxes vary widely

Federal tax is only part of the picture. Your state's treatment of capital gains can add significantly to what you owe. Most states tax capital gains as ordinary income, meaning they explore your state income tax rate to the gain. If your state income tax rate is 5%, you pay 5% on your capital gains in addition to federal tax.

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest, not capital gains). If you live in one of these states, you owe no state capital gains tax.

A smaller group of states—California, Washington, Oregon, Minnesota, and Vermont—have separate capital gains taxes that explore only to investment profits. These typically kick in above a threshold. Washington's capital gains tax, for example, applies only to long-term gains above $250,000 per year and taxes them at 7%. California taxes long-term gains above $250,000 at 13.3% (the state's top income tax rate). These are in addition to federal tax.

How to report capital gains on your tax return

You report capital gains on Schedule D (Form 1040), which you attach to your federal tax return. Schedule D has two sections: one for short-term gains and one for long-term gains. You list each sale separately, including the date you bought the asset, the date you sold it, the sale price, and your cost basis (what you paid for it, plus any improvements).

Your broker or investment company sends you a Form 1099-B or Form 1099-S listing your sales for the year. Use this document to fill out Schedule D. If you sold real property, you may receive a Form 1099-S instead. The IRS also receives a copy, so your numbers must match.

If your capital gains are straightforward—a few stock sales, for example—you can file by hand. If you have many transactions or own rental property, tax software or a tax professional can save time and catch errors. The software walks you through each sale and calculates your total gain or loss automatically.

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. If you sold a stock for a $5,000 gain and another stock for a $3,000 loss, your net capital gain is $2,000, and you pay tax only on that amount. This is called loss harvesting, and it is a common strategy to reduce capital gains tax.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income. Any remaining loss carries forward to future years, so you can use it to offset gains in years to come. This rule applies to individuals; corporations have different rules.

Keep records of all your sales, including losses. When you file, list both gains and losses on Schedule D. The form calculates your net gain or loss automatically.

Special situations: inherited assets and primary residences

If you inherit an asset, the IRS gives you a stepped-up basis. This means your cost basis becomes the asset's fair market value on the date of the person's death, not what they originally paid for it. If your parent bought a house for $100,000 and it was worth $400,000 when they died, your basis is $400,000. If you sell it a month later for $410,000, your capital gain is only $10,000, not $310,000. This can save a substantial amount in tax.

If you sell a primary residence, you may be able to exclude up to $250,000 of the gain from tax (or $500,000 if you are married filing jointly). You must have owned and lived in the home for at least two of the five years before the sale. This exclusion applies once every two years. If you sell a rental property or investment property, this exclusion does not explore.

Frequently Asked Questions

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

No. A loss means you sold for less than you paid, so there is no gain to tax. You can use the loss to offset other gains or, if losses exceed gains, deduct up to $3,000 against ordinary income in that year.

What if I hold an asset for exactly one year—is it long-term or short-term?

It is short-term. The IRS counts the holding period as "more than one year" for long-term treatment. If you bought on January 15, 2023, and sold on January 15, 2024, it is exactly one year, so it is short-term. You must sell on January 16, 2024, or later for long-term treatment.

Can I avoid capital gains tax by not selling?

Yes. You owe capital gains tax only when you sell. If you hold an investment indefinitely, no tax is due. However, if you pass the asset to heirs, they receive a stepped-up basis, so they can sell without owing tax on the gain that occurred during your lifetime.

Do I owe capital gains tax on cryptocurrency or digital assets?

Yes. The IRS treats cryptocurrency, NFTs, and other digital assets as property. When you sell or trade them, any gain is subject to capital gains tax at the same rates as stocks or real estate. You report the transaction on Schedule D.

What if I made a capital gain but have not received the money yet?

You owe tax in the year you sold, not the year you received payment. If you sold property in 2024 but the buyer is paying you over time, you still report the gain on your 2024 return. You may owe estimated tax payments to avoid penalties.