What Capital Gains Tax Is

Capital gains tax is the tax you pay when you sell something you own for more than you paid for it. The difference between what you paid and what you sold it for is your gain, and that gain is taxable income. You owe this tax on stocks, real estate, artwork, cryptocurrency, or any asset that increased in value while you held it.

The tax applies only to the profit, not the full sale price. If you bought a stock for $1,000 and sold it for $1,500, your capital gain is $500 — and that $500 is what gets taxed, not the entire $1,500.

Capital gains tax is separate from income tax on wages or salary, though both are reported to the IRS. The rate you pay depends on how long you held the asset and how much total income you earned that year.

Key Takeaways

  • Capital gains tax applies only to the profit when you sell an asset for more than you paid for it, not to the full sale price.
  • Short-term gains (assets held one year or less) are taxed at your ordinary income tax rate, which can be as high as 37 percent.
  • Long-term gains (assets held more than one year) are taxed at lower rates: 0, 15, or 20 percent depending on your income level.
  • You report capital gains on Schedule D of your tax return, and the IRS matches it against records from your broker or seller.
  • Losses on asset sales can reduce your taxable gains, and unused losses can carry forward to future years.

Short-Term vs. Long-Term Capital Gains

The IRS taxes capital gains at different rates depending on how long you owned the asset. If you held it for one year or less, it is a short-term capital gain, and you pay tax at your ordinary income tax rate — the same rate as your wages. For 2024, that ranges from 10 percent to 37 percent depending on your total income and filing status.

If you held the asset for more than one year, it is a long-term capital gain, and you pay a lower rate: 0 percent, 15 percent, or 20 percent. Which rate applies depends on your taxable income. A single filer with income under $47,025 in 2024 pays 0 percent on long-term gains. Income from $47,025 to $518,900 is taxed at 15 percent. Income above that is taxed at 20 percent. These income thresholds change each year and vary by filing status.

The difference matters. Holding an asset just a few months longer can cut your tax bill significantly. A $10,000 gain taxed as short-term at your 32 percent rate costs $3,200. The same gain taxed as long-term at 15 percent costs $1,500.

How to Calculate Your Capital Gain

Your capital gain is the sale price minus what you originally paid, minus any costs directly tied to the sale. If you bought 100 shares of stock at $50 per share ($5,000 total) and sold them at $75 per share ($7,500 total), your gain is $2,500. If you paid a $50 broker fee to sell, your gain is $2,450.

For real estate, you can deduct the cost of improvements you made — a new roof, kitchen renovation, or addition — but not routine maintenance like painting or repairs. You can also deduct selling costs like realtor commissions and title insurance. Your home sale may be exempt entirely: if you are single and lived in the home two of the last five years, you can exclude up to $250,000 of gain from tax. Married couples filing jointly can exclude up to $500,000.

Keep records of what you paid, what you sold it for, and any costs tied to the purchase or sale. Your broker sends you a Form 1099-B showing sale proceeds, but you have to provide the original cost basis yourself.

Reporting Capital Gains on Your Tax Return

You report capital gains on Schedule D, a form attached to your main tax return (Form 1040). List each sale separately: the asset, the date you bought it, the date you sold it, what you paid, what you sold it for, and your gain or loss. The IRS uses this to sort your gains into short-term and long-term buckets and calculate your total tax.

Your broker or the person who bought the asset from you files a Form 1099-B or Form 1099-S with the IRS showing the sale price. The IRS matches this against your return, so underreporting or omitting a sale creates a mismatch that triggers a notice. If you sold through a brokerage account, the broker usually provides a year-end statement showing your gains and losses, which you can use to fill out Schedule D.

If you have many transactions, you may file Form 8949 (Sales of Capital Assets) instead of listing them all on Schedule D. The totals from Form 8949 then transfer to Schedule D.

Using Losses to Reduce Your Tax Bill

If you sold an asset for less than you paid for it, you have a capital loss. You can use capital losses to offset capital gains. If you had $8,000 in gains and $3,000 in losses, your net gain is $5,000, and you pay tax on $5,000 instead of $8,000.

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). If your losses are larger than $3,000, the unused amount carries forward to the next year, and you can use it then. This means a bad year in the market does not go to waste — you can use those losses over multiple years.

Some investors deliberately sell losing positions late in the year to offset gains from winning positions. This is called tax-loss harvesting. However, if you sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the IRS disallows the loss under the wash-sale rule. The loss is deferred until you eventually sell the replacement security.

State and Local Capital Gains Taxes

Most states tax capital gains as ordinary income, meaning you pay your state income tax rate on top of the federal rate. A few states have no income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming), so residents pay only federal capital gains tax. A handful of states — California, Hawaii, and Vermont — tax capital gains at higher rates than ordinary income.

Some states have recently introduced separate capital gains taxes. Washington State, for example, taxes long-term capital gains on stocks and certain other assets at 7 percent, separate from income tax. These rules are new and still being litigated, so check your state's tax agency website for current rules in your state.

If you moved to a new state during the year you sold an asset, you may owe tax to both states. The state where you lived when you sold it usually has the primary claim, but you should report the sale to both and claim a credit on one return to avoid double taxation.

Special Situations and Exceptions

Certain assets get preferential treatment. Collectibles — art, coins, stamps — are taxed at a maximum rate of 28 percent on long-term gains, higher than the standard 20 percent but lower than short-term rates. may have access to small business stock can exclude 50 to 100 percent of gains if you held it for five years or more, though this applies only to stock in certain small corporations.

If you inherit an asset, you get a step-up in 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 $200,000 and it was worth $500,000 when they died, your basis is $500,000. If you sell it the next month for $510,000, your gain is only $10,000, not $310,000. This step-up applies to most inherited assets but not to certain retirement accounts.

Gifts do not get a step-up. If you give an asset to someone, they inherit your cost basis. If you bought stock for $1,000 and gave it to your child when it was worth $5,000, their basis is still $1,000, and they owe tax on the $4,000 gain if they sell it.

Frequently Asked Questions

Do I owe capital gains tax if I have not sold yet?

No. Capital gains tax applies only when you sell the asset. If you own a stock that doubled in value but you have not sold it, you owe no tax on the gain. The gain becomes taxable only when you sell it or transfer it to someone else.

What if I sold an asset at a loss — can I deduct it?

Yes, but only against capital gains or up to $3,000 of ordinary income per year. If you had no gains that year, you can deduct $3,000 of losses against wages or other income. Losses larger than $3,000 carry forward to future years with no time limit.

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 one year or less, it is short-term. If it is more than one year, it is long-term. The IRS counts the purchase date as day zero and the sale date as day one, so buying on January 1 and selling on January 2 of the next year is long-term.

Do I have to report capital gains if I made less than $1,000?

If your broker issued a Form 1099-B, you must report it, even if the gain is small. The IRS receives a copy and will notice if you omit it. However, if you sold an asset privately (not through a broker) and no form was issued, you still owe tax on the gain, but you report it yourself on Schedule D.

What happens if I do not report a capital gain?

If your broker reported the sale to the IRS on a 1099 form, the IRS will eventually notice the discrepancy and send you a notice. You will owe the tax plus interest and may face penalties. If the gain was large or the omission appears intentional, the IRS can pursue it for up to six years or longer.