What long-term capital gains tax is
Long-term capital gains tax is the tax you owe when you sell an investment—a stock, mutual fund, real estate, or other asset—that you have owned for more than one year and it has gone up in value. The tax applies only to the profit, not the full sale price. The rate you pay depends on your income level, not on how much the asset increased in value.
The reason it exists is that the federal government taxes investment profits differently than wages. When you sell something you have held for over a year, you get a lower tax rate than you would on ordinary income. If you sell something you have owned for one year or less, the profit counts as ordinary income and is taxed at your regular income tax rate, which is usually higher.
You report long-term capital gains on your federal tax return using Form 1040 and Schedule D. Your broker or investment company will send you a Form 1099-B after the end of the year showing what you sold and what you received.
Key Takeaways
- Long-term capital gains explore only to profits on investments you have owned for more than one year, and the tax rate is lower than your ordinary income tax rate.
- The federal long-term capital gains rate is 0%, 15%, or 20% depending on your total income for the year, not on the size of the gain.
- You calculate your gain by subtracting what you paid for the asset (your basis) from what you sold it for, and you owe tax only on that difference.
- Some states also tax capital gains, and the rules vary by state—a few have no capital gains tax at all.
- You report long-term capital gains on Schedule D of your tax return, and your broker sends you the sale information on Form 1099-B.
The three federal tax rates and which income level triggers each one
The federal government uses three long-term capital gains rates: 0%, 15%, and 20%. Which rate applies to you depends on your taxable income for the year—the income left after you subtract deductions. The income thresholds change every year because they are adjusted for inflation.
For 2024, the 0% rate applies if your taxable income is below $47,025 (if you file single) or $94,050 (if you file married filing jointly). The 15% rate applies to income between those amounts and higher thresholds. The 20% rate applies to income above the highest threshold. These numbers shift each year, so you should check the current year's thresholds when you file.
The key point is that your capital gains are taxed at the rate that matches your total income bracket, not at a separate rate. If you earn $50,000 in wages and have a $10,000 capital gain, your total income is $60,000, and the capital gains portion is taxed according to where that $60,000 falls in the brackets.
How to calculate the gain or loss on an investment
Your capital gain is the difference between what you paid for an asset and what you sold it for. The amount you paid is called your basis. If you bought 100 shares of a stock at $50 per share, your basis is $5,000. If you sold those shares at $75 per share, you received $7,500, so your gain is $2,500.
Basis includes the price you paid plus any fees or commissions you paid to buy the asset. If you inherited an asset or received it as a gift, the basis rules are different—inherited assets get a "stepped-up basis" equal to their value on the date of death, which can significantly reduce the taxable gain.
If you sell for less than you paid, you have a capital loss. You can use capital losses to offset capital gains in the same year. If your losses exceed your gains, you can deduct up to $3,000 of the net loss against your ordinary income in that year. Any remaining loss carries forward to future years.
The difference between long-term and short-term capital gains
The holding period determines whether a gain is long-term or short-term. If you own an asset for more than one year before selling it, the gain is long-term and gets the preferential 0%, 15%, or 20% rates. If you own it for one year or less, the gain is short-term and is taxed as ordinary income at your regular tax bracket rate, which can be as high as 37%.
The one-year clock starts the day after you buy the asset. If you buy a stock on January 15, 2024, you can sell it on January 16, 2025, and the gain will be long-term. If you sell on January 15, 2025, it is still short-term.
Short-term gains are reported on Schedule D as well, but they are taxed differently. Many investors hold assets specifically to cross the one-year threshold and may have access to for the lower long-term rate.
State capital gains taxes and how they vary
Some states tax capital gains as ordinary income, some tax them at a separate rate, and some do not tax them at all. Washington, Oregon, and Illinois have separate capital gains taxes that explore only to long-term gains on certain types of assets, usually stocks and bonds. The rates and thresholds vary by state.
Most states that have an income tax treat capital gains as part of your taxable income and tax them at your state income tax rate. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all, so there is no state capital gains tax.
You report state capital gains on your state tax return, which usually mirrors the federal Schedule D. Your broker's 1099-B will help you identify which sales are long-term and which are short-term, and you use that information for both federal and state returns.
When you must report capital gains and how to file
You must report all capital gains and losses on your federal tax return, even if you do not owe tax on them. You use Schedule D (Form 1040) to list each sale: the date you bought it, the date you sold it, the sale price, your basis, and the gain or loss. If you have many transactions, you may also file Form 8949, which feeds into Schedule D.
Your broker sends you a Form 1099-B by January 31 of the year after the sale. This form shows the sale price and the date sold, but it may not show your basis accurately—brokers sometimes do not have complete information about when you bought the asset or what you paid. You are responsible for providing the correct basis on your return.
If you use tax software or a tax professional, you can upload the 1099-B information directly into your return. The software will help you separate long-term from short-term gains and explore the correct tax rates. If you file by hand, you fill in Schedule D line by line.
Special situations: inherited assets, gifts, and wash sales
If you inherit an investment, the basis resets to its value on the date the person died. This is called a stepped-up basis. If your parent bought a stock for $10,000 and it was worth $50,000 when they died, your basis is $50,000. If you sell it the next day for $50,000, you have no gain and owe no tax. This rule applies to most inherited assets, including real estate.
If someone gives you an investment as a gift, you inherit their basis, not the current value. If your friend bought a stock for $5,000 and gave it to you when it was worth $20,000, your basis is $5,000. If you sell it for $25,000, your gain is $20,000, not $5,000.
A wash sale occurs when you sell an investment at a loss and buy the same or a substantially identical investment within 30 days before or after the sale. When this happens, you cannot deduct the loss. Instead, the loss is added to the basis of the new investment. This rule prevents people from selling investments to claim a loss while keeping the same investment.
Frequently Asked Questions
Do I owe capital gains tax if I sell at a loss?
No, you do not owe tax on a loss. Instead, you can use the loss to reduce any capital gains you have in the same year. If losses exceed gains, you can deduct up to $3,000 against ordinary income. Any remaining loss carries to the next year.
What if I do not know my original purchase price?
Contact your broker or the company that held the investment. They may have records going back several years. If records are truly unavailable, you can estimate based on historical price data, but keep documentation of how you arrived at the figure. The IRS may ask for proof.
Do I have to pay capital gains tax the year I sell, or can I pay it later?
You owe the tax in the year you sell the asset. You report it on your tax return for that year, and if you owe tax, it is due when your return is due (usually April 15). You cannot defer the tax to a later year unless you use a special strategy like a 1031 exchange for real estate.
Does the 0% capital gains rate mean I pay nothing?
Yes, if your total taxable income falls in the 0% bracket, you owe no federal tax on long-term capital gains. However, you still must report the gains on Schedule D. You may still owe state capital gains tax depending on where you live.
What is the difference between capital gains and dividends?
Capital gains are profits from selling an asset. Dividends are payments a company makes to shareholders from its earnings. may have access to dividends (from stocks held over 60 days) are taxed at the same long-term capital gains rates. Ordinary dividends are taxed as ordinary income.