What capital gains tax is
Capital gains tax is a tax on the profit you make when you sell something you own — a stock, a house, a piece of art, cryptocurrency, or a business. The tax applies only to the gain (the difference between what you paid and what you sold it for), not to the full sale price.
If you bought a stock for $1,000 and sold it for $1,500, your capital gain is $500. That $500 is what gets taxed, not the entire $1,500. If you sold it for less than you paid, you have a capital loss instead, which can reduce your tax burden in other ways.
Capital gains tax is separate from income tax on wages or salary. The IRS treats investment profits differently because they are not earned income — they are returns on money you already had.
Key Takeaways
- Capital gains are taxed only on the profit you make, not on the full sale price of what you sold.
- Long-term capital gains (assets held over one year) are taxed at lower rates than short-term gains, which are taxed as ordinary income.
- Federal capital gains tax rates are 0%, 15%, or 20% for long-term gains, depending on your income level, while short-term gains use your regular income tax bracket.
- Many states also charge capital gains tax, and the rates and rules vary by state.
- You report capital gains on your federal tax return using Schedule D, and you must report them even if you did not receive a 1099 form.
Long-term versus short-term capital gains
How long you hold an asset before selling it determines which tax rate applies. If you own it for more than one year, it is a long-term capital gain. If you sell it within one year, it is a short-term capital gain.
Short-term capital gains are taxed as ordinary income — at your regular income tax rate, which can be as high as 37% at the federal level. Long-term capital gains are taxed at preferential rates: 0%, 15%, or 20%, depending on your total income for the year. This is why holding an investment longer usually results in a lower tax bill.
The holding period starts the day after you buy and ends the day you sell. If you bought a stock on March 15 and sold it on March 16 of the following year, it qualifies as long-term.
Federal tax rates for long-term gains
The federal long-term capital gains rate you pay depends on your taxable income bracket for that year. The three rates are 0%, 15%, and 20%.
| Tax Rate | Single Filers (2024) | Married Filing Jointly (2024) |
|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 |
| 15% | $47,025 to $518,900 | $94,050 to $583,750 |
| 20% | Over $518,900 | Over $583,750 |
These income thresholds change each year. The IRS publishes updated brackets annually. Your taxable income includes wages, interest, dividends, and capital gains combined, so a large gain can push you into a higher bracket.
You do not automatically pay the highest rate just because you have a capital gain. The gain is added to your other income, and you pay the rate that applies to your total. If you are single, earn $40,000 in wages, and have a $10,000 long-term gain, your total taxable income is $50,000 — which puts part of the gain in the 15% bracket.
State capital gains taxes
Most states do not have a separate capital gains tax, but some do. California, New York, Oregon, Washington, Illinois, and a few others tax capital gains as ordinary income or at a flat rate. The rates and rules vary significantly by state.
Washington state, for example, has a 7% capital gains tax on long-term gains over $250,000, while California taxes capital gains at the same rate as regular income (up to 13.3%). Some states have no income tax at all and therefore no capital gains tax.
If you live in a state with a capital gains tax, you will owe both federal and state tax on your gains. Check your state's tax authority website or a tax professional to understand your state's rules.
How to report capital gains on your tax return
You report capital gains to the IRS using Schedule D, which is part of Form 1040. You list each sale separately — the date you bought it, the date you sold it, your cost basis (what you paid), the sale price, and the gain or loss.
If you sold stocks or mutual funds, your broker will send you a Form 1099-B showing the transactions. If you sold real estate, you may receive a Form 1099-S from the title company or real estate agent. These forms go to the IRS as well, so they will know if you do not report the sale.
Even if you did not receive a form, you still must report the gain. If you sold something privately — a car, jewelry, or a business — and have no 1099, you are still required to report it on Schedule D.
Capital losses and tax-loss harvesting
If you sell an investment for less than you paid, you have a capital loss. You can use capital losses to offset capital gains dollar-for-dollar. If you have $5,000 in gains and $3,000 in losses, you report a net gain of $2,000.
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). Any losses beyond that carry forward to future years, so you can use them later.
Some investors deliberately sell losing positions late in the year to offset gains — a strategy called tax-loss harvesting. This is legal and can reduce your tax bill, but you must follow the IRS "wash-sale rule," which prevents you from buying the same or a substantially identical security within 30 days before or after the sale.
Special situations: home sales and inherited assets
If you sell your primary residence, you may not owe capital gains tax on part or all of the gain. The IRS allows you to exclude up to $250,000 of gain (or $500,000 if married filing jointly) if you owned and lived in the home for at least two of the last five years before the sale.
If you inherit an asset, the cost basis is "stepped up" to its fair market value on the date of death. This means if your parent bought a stock for $10,000 and it was worth $50,000 when they died, your new cost basis is $50,000. If you sell it when ready for $50,000, you owe no capital gains tax, even though the asset gained $40,000 during your parent's lifetime.
These rules can significantly reduce or eliminate your capital gains tax in specific situations. A tax professional can help you understand whether they explore to you.
Frequently Asked Questions
Do I owe capital gains tax if I have not sold yet?
No. Capital gains tax applies only when you sell and realize the gain. If you own a stock that has doubled in value but you have not sold it, you owe no tax. The gain is "unrealized" until you sell.
What is cost basis and how do I calculate it?
Cost basis is what you paid for an asset, including commissions and fees. If you bought a stock for $1,000 and paid a $10 commission, your cost basis is $1,010. If you received the asset as a gift, your basis is usually what the giver paid. If you inherited it, your basis is stepped up to its value on the date of death.
Can I deduct investment losses from my taxes?
Yes, but only up to $3,000 per year against ordinary income. Excess losses carry forward to future years. You can also use losses to offset gains dollar-for-dollar with no limit.
Do I owe capital gains tax on cryptocurrency?
Yes. The IRS treats cryptocurrency as property, not currency. When you sell, trade, or spend it, you owe capital gains tax on the difference between what you paid and what it was worth when you sold or used it.
What happens if I do not report a capital gain?
The IRS will likely catch it because your broker reports the sale on a 1099 form. Unreported gains can result in penalties, interest, and potential criminal charges if the IRS determines it was intentional. It is safer and simpler to report all gains, even small ones.