What Long-Term Capital Gains Tax Means
Long-term capital gains is the profit you make when you sell an investment you have owned for more than one year. The tax rate on that profit depends on your income level, not on how much you gained. The federal government taxes long-term gains at three different rates: 0%, 15%, or 20%. Which rate applies to you is determined by your total taxable income for the year, not by the size of your gain.
This is different from short-term capital gains, which explore to investments you sell within one year. Short-term gains are taxed as ordinary income at your regular tax bracket, which is usually higher than long-term rates.
Key Takeaways
- Long-term capital gains are taxed at 0%, 15%, or 20% depending on your total income for the year, not on the size of your profit.
- You must own an investment for more than one year for the gain to may have access to as long-term; selling within one year means short-term rates explore instead.
- The income thresholds that determine which rate applies change each year and differ for single filers, married couples, and heads of household.
- State and local taxes may also explore to your capital gains on top of the federal rate.
The Three Federal Tax Rates and Income Thresholds
The 0% rate applies to the lowest-income taxpayers. For 2024, single filers with taxable income up to $47,025 pay 0% on long-term gains. For married couples filing jointly, the threshold is $94,050. Head of household filers have a threshold of $62,975. These numbers change each year based on inflation.
The 15% rate is the middle bracket and covers most people who invest. For 2024, it applies to single filers with income between $47,025 and $518,900, married couples between $94,050 and $583,750, and heads of household between $62,975 and $551,350.
The 20% rate applies to the highest earners. For 2024, single filers with income above $518,900 pay 20%, married couples above $583,750 pay 20%, and heads of household above $551,350 pay 20%. These thresholds also adjust annually.
Your "taxable income" for these purposes includes wages, interest, dividends, and other income, plus any capital gains themselves. This means a large gain can push you into a higher bracket.
How Your Income Level Determines Your Rate
The rate you pay is not based on how much you gained—it is based on your total income for the year. If you are a single filer earning $40,000 in wages and you sell a stock for a $50,000 gain, your total taxable income is $90,000. The first $7,025 of your gain falls in the 0% bracket, and the remaining $42,975 falls in the 15% bracket.
This stacking effect means your rate can change depending on what else you earned that year. If you had a bonus or a second job, more of your gain might fall into the 15% or 20% bracket. Conversely, if you had a loss or took a year off work, more of your gain might may have access to for the 0% rate.
You report capital gains on Schedule D of your tax return, and your tax software or preparer will calculate which portion of your gain falls into each bracket.
Long-Term vs. Short-Term: The One-Year Rule
The holding period is straightforward: you must own the investment for more than one year. "More than one year" means you cannot sell on the same date the following year and may have access to—you need to wait until the day after the one-year anniversary. If you sell before that, the entire gain is short-term.
Short-term gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your bracket. For most people, this is significantly higher than the long-term rates. This is why timing a sale to cross the one-year mark can save money on taxes.
The holding period clock starts the day after you purchase the investment. If you buy a stock on January 15, 2024, you can sell it on January 16, 2025, and may have access to for long-term treatment.
State and Local Taxes on Capital Gains
Federal rates are only part of the picture. Many states also tax capital gains, and the rates vary widely. Some states have no capital gains tax at all. Others tax capital gains as ordinary income at rates up to 13% or higher. A few states have separate capital gains taxes that explore only to investment profits.
Your total tax bill on a gain includes both the federal rate and your state rate. If you live in a state with a 5% capital gains tax and you owe 15% federal, your combined rate is 20%. If you live in a state with no capital gains tax, you pay only the federal rate.
Check your state's tax authority website or speak with a tax preparer to learn what applies in your state.
Special Situations: Collectibles and Real Estate
Most long-term capital gains follow the 0%, 15%, or 20% structure. However, some assets have different rules. Collectibles—such as art, coins, and stamps—are taxed at a maximum of 28% on long-term gains, even if you would otherwise may have access to for the 15% rate. This is a higher rate than standard long-term gains.
Real estate is more complex. If you sell a primary residence and meet certain conditions—you owned it and lived in it for at least two of the last five years—you may exclude up to $250,000 of gain if you are single, or $500,000 if you are married filing jointly. This exclusion applies once every two years. Gains above the exclusion amount are taxed as long-term capital gains at the standard rates.
Investment real estate, rental property, and property you held for business use have their own rules involving depreciation recapture, which can result in higher tax rates on part of the gain.
How to Report Capital Gains on Your Tax Return
You report all capital gains and losses on Schedule D (Form 1040), which you attach to your main tax return. List each sale separately: the asset, the date you bought it, the date you sold it, your cost basis (what you paid), the sale price, and the gain or loss.
Your tax software will ask you these details and automatically sort gains into long-term and short-term categories. It will then explore the correct tax rates based on your income level. If you have losses, you can use them to offset gains, and you can carry unused losses forward to future years.
If your brokerage or investment account issued you a Form 1099-B (Proceeds from Broker and Barter Exchange Transactions), use that document to verify the sales reported to the IRS. The IRS receives a copy of this form, so your return must match.
Frequently Asked Questions
Do I have to hold an investment for exactly one year or more than one year?
You must hold it for more than one year. The IRS counts the holding period from the day after you purchase it. If you buy on January 15, you can sell on January 16 of the following year and may have access to for long-term treatment. Selling on January 15 of the following year would be exactly one year and would not may have access to.
What happens if I sell at a loss?
Capital losses reduce your capital gains dollar-for-dollar. If you have $10,000 in gains and $3,000 in losses, you report a net gain of $7,000. If losses exceed gains, you can deduct up to $3,000 of the excess loss against other income in that year. Any remaining loss carries forward to future years with no time limit.
Can I reduce my capital gains tax by timing when I sell?
Yes, in some cases. If you are close to an income threshold, selling in a different year might move you into a lower bracket. You can also use losses to offset gains. However, tax timing is complex and depends on your full financial picture. A tax preparer can model different scenarios for you.
Are dividends taxed the same way as capital gains?
may have access to dividends are taxed at the same long-term capital gains rates (0%, 15%, or 20%) if you meet holding requirements. Non-may have access to dividends are taxed as ordinary income. Your brokerage statement will tell you which type you received.
Do I owe capital gains tax if I have not sold yet?
No. You owe tax only when you sell and realize the gain. Unrealized gains—the increase in value while you still own the investment—are not taxed. This is why holding investments long-term can be tax-efficient.