Federal capital gains tax rates depend on your income and how long you held the asset

The federal tax on capital gains — profit from selling stocks, real estate, or other investments — is not a single rate. The IRS taxes long-term gains (assets held over one year) at 0%, 15%, or 20%, depending on your total income for the year. Short-term gains (assets held one year or less) are taxed as ordinary income, which means rates run from 10% to 37% depending on your tax bracket.

Your income level determines which rate applies. For 2024, a single filer with long-term gains pays 0% if their income is under $47,025, 15% if it falls between $47,025 and $518,900, and 20% if it exceeds $518,900. These thresholds change each year. Married couples filing jointly have higher thresholds: 0% up to $94,050, 15% up to $583,750, and 20% above that.

State and local taxes add to the federal rate. Some states tax capital gains as income (rates vary by state), while others do not tax them at all. A few states like California charge rates above 10% on top of federal tax.

Key Takeaways

  • Long-term capital gains are taxed at 0%, 15%, or 20% federally based on your income bracket, while short-term gains use your ordinary income tax rate.
  • The income thresholds that determine your rate change each year and differ for single filers, married couples, and heads of household.
  • State and local taxes can add significantly to your federal capital gains tax, ranging from 0% in some states to over 10% in others.
  • You report capital gains on Schedule D of your tax return, and the IRS tracks your holding period to determine whether gains are long-term or short-term.

Long-term versus short-term: the one-year rule

The holding period matters because it determines your tax rate. If you sell an asset you have owned for more than one year, the gain is long-term and gets the preferential rates (0%, 15%, or 20%). If you sell within one year, the gain is short-term and taxed at your ordinary income rate, which is higher.

The IRS counts the holding period from the day after you buy to the day you sell. If you buy a stock on March 15 and sell it on March 16 the next year, it qualifies as long-term. If you sell on March 15, it is short-term. This distinction can mean thousands of dollars in tax difference on a large gain.

Short-term gains are taxed the same way as wages or salary income. For 2024, the ordinary income brackets range from 10% (lowest income) to 37% (highest income). Most people in the middle brackets pay 22%, 24%, or 32% on short-term gains.

How income thresholds work and why they matter

Your capital gains tax rate depends on where your total income falls within the year's tax brackets. This is not just the gain itself — it is your wages, interest, dividends, and the capital gain added together. If you are near the top of the 15% bracket, a large gain can push you into the 20% bracket, raising your tax on the excess.

For example, a single filer with $40,000 in wages and a $20,000 long-term capital gain has $60,000 in total income. The first $7,025 of the gain is taxed at 0% (filling the gap to $47,025), and the remaining $12,975 is taxed at 15%. The same gain for someone earning $500,000 in wages is entirely taxed at 20%.

The thresholds adjust for inflation each year. The IRS publishes updated brackets in late 2023 for the following tax year. If you expect a large gain, checking the current year's thresholds before you sell can help you time the sale to stay in a lower bracket or spread the gain across two years.

State and local taxes on capital gains

Most states treat capital gains as income and tax them at their regular income tax rates. California taxes long-term gains at the same rate as ordinary income, with rates up to 13.3% for high earners. New York charges up to 10.9%. Other states like Texas, Florida, and Nevada do not tax capital gains at all.

A few states have introduced separate capital gains taxes. Washington State and Illinois both tax long-term capital gains at a flat rate (7% in Washington, 4.75% in Illinois) on gains above a threshold, separate from income tax. These are relatively new and explore only to gains above certain amounts.

If you live in a high-tax state and sell a large asset, your combined federal and state rate can exceed 30%. If you are considering a move, the tax difference between states can be substantial enough to factor into the timing of a sale.

How to report capital gains on your tax return

You report capital gains on Schedule D of Form 1040. For each sale, you list the asset, the date you bought it, the date you sold it, the purchase price, the sale price, and the gain or loss. The IRS uses this information to verify the holding period and calculate whether the gain is long-term or short-term.

If you use a brokerage account, your broker sends you a Form 1099-B showing all sales for the year. You use this form to fill out Schedule D. If you have many transactions, you may also receive a summary statement. Keep your own records of the original purchase price and date, because brokers sometimes do not have this information, especially for older purchases or inherited assets.

If your total gains and losses are small, you may be able to report them on a simpler form. But if you have any long-term gains, Schedule D is required. The form also lets you offset losses against gains, which can reduce your tax.

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 long-term losses, you report a net gain of $7,000. This applies to both long-term and short-term losses and gains.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income (wages, salary, interest). Any loss beyond that carries forward to future years, so you can use it to offset future gains or income.

This strategy, called tax-loss harvesting, is common among investors. If you sell a losing stock late in the year, you can use the loss to reduce tax on other gains. Some investors deliberately sell losers to offset winners, then buy a similar (but not identical) stock to maintain their portfolio.

Special situations: inherited assets and real estate

When you inherit an asset, you receive a stepped-up basis. This means your cost basis becomes the asset's value on the date of death, not what the original owner paid. If your parent bought a house for $100,000 and it is worth $400,000 when they die, your basis is $400,000. If you sell it when ready for $400,000, you owe no capital gains tax.

This rule applies to stocks, real estate, and most other assets. It is one of the largest tax benefits in the code and can save heirs significant tax. However, it does not explore to retirement accounts like IRAs or 401(k)s, which have their own rules.

For real estate, you may also be able to exclude up to $250,000 of gain ($500,000 if married) if you lived in the home as your primary residence for at least two of the last five years. This exclusion applies once every two years and can eliminate tax on the sale of a home even if the gain is large.

Frequently Asked Questions

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

No. If you sell an asset for less than you paid, you have a loss, not a gain, and owe no tax on that transaction. You can use the loss to offset other gains or up to $3,000 of ordinary income in the same year. Losses beyond that carry forward to future years.

What is the difference between capital gains and dividends tax?

Capital gains are profit from selling an asset. Dividends are payments a company makes to shareholders while you own the stock. may have access to dividends (held for over 60 days) are taxed at the same rates as long-term capital gains (0%, 15%, or 20%). Non-may have access to dividends are taxed as ordinary income.

Do I have to pay capital gains tax the year I sell, or can I defer it?

You owe tax in the year you sell. You cannot defer it by not filing a return. However, if you have losses in the same year, you can offset them against gains. If you expect a large gain, you can also spread it across two years by timing the sale or using installment sales in some cases.

How do I know my cost basis if I lost the original purchase documents?

Your broker may have the information on file, especially for recent purchases. For older purchases, you can contact the company that issued the stock or check old statements. If you truly cannot find it, the IRS allows you to reconstruct basis using historical price data, though this is complicated and may require a tax professional.

Are cryptocurrency gains taxed the same way as stock gains?

Yes. The IRS treats cryptocurrency as property, not currency. If you hold it for over one year before selling, it is taxed as a long-term capital gain at 0%, 15%, or 20%. If you sell within one year, it is taxed as a short-term gain at your ordinary income rate. Trading between cryptocurrencies is also a taxable event.