The current capital gains tax rate depends on your income and how long you held the asset

The federal tax you owe when you sell an investment, property, or other asset depends on two things: how much money you made on the sale, and how long you owned it before selling. The IRS taxes profits from assets held one year or less as short-term capital gains, which are taxed like ordinary income at rates from 10% to 37%. Profits from assets held longer than one year are long-term capital gains, taxed at lower rates: 0%, 15%, or 20%, depending on your total income for the year.

These federal rates are set by law and do not change month to month, but your actual tax bill also depends on your state (some states add their own capital gains tax) and whether you have other income that year. This guide explains how the federal system works and what affects your rate.

Key Takeaways

  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% federally, depending on your income bracket for that year.
  • Short-term capital gains (assets held one year or less) are taxed as ordinary income at rates from 10% to 37%.
  • Your tax bracket is based on your total income for the year, not just the gain from the sale.
  • Some states impose their own capital gains tax on top of the federal rate, so your total tax varies by where you live.
  • The difference between long-term and short-term rates can save you thousands of dollars on the same sale.

How long-term capital gains rates work

Long-term capital gains are taxed at three federal rates: 0%, 15%, or 20%. Which rate applies to you depends on your income for the year and your filing status (single, married filing jointly, head of household, or married filing separately). The IRS updates these income thresholds each year to account for inflation.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025, and married couples filing jointly up to $94,050. The 15% rate covers the next tier of income, and the 20% rate applies to the highest earners. These thresholds shift annually, so the exact numbers change from year to year. The key point is that your capital gain is added to your other income for the year, and the combined total determines which rate applies.

This means you can sometimes have a large gain taxed at a lower rate if your other income is low, or a smaller gain pushed into a higher bracket if you had a big salary year. Planning the timing of a sale around your other income can make a real difference.

How short-term capital gains rates work

Short-term capital gains are taxed as ordinary income, using the same tax brackets as wages or salary. For 2024, those rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on how much total income you have. Because short-term gains are added to your other income, a large gain can push you into a much higher bracket than you would otherwise be in.

The difference between short-term and long-term rates is often substantial. A $50,000 gain on an asset you sold after holding it eleven months could be taxed at 24% or higher as short-term income, costing you $12,000 or more. The same gain on an asset held thirteen months might be taxed at 15%, costing $7,500. Waiting just one month can save thousands.

What counts as a capital gain

A capital gain is the profit you make when you sell an asset for more than you paid for it. The gain is the sale price minus what you originally paid (your cost basis), minus any selling costs like broker fees or real estate commissions. Common assets that generate capital gains include stocks, mutual funds, real estate, cryptocurrency, and collectibles.

If you sell an asset for less than you paid, you have a capital loss. You can use capital losses to offset capital gains in the same year, and if your losses exceed your gains, you can deduct up to $3,000 of the excess loss against other income. Any remaining losses carry forward to future years.

How state taxes add to your federal rate

Nine states currently have a capital gains tax on top of the federal tax: California, Connecticut, Delaware, Illinois, Maryland, Minnesota, New Jersey, New York, and Washington. These state rates vary widely. California taxes long-term capital gains at the same rate as ordinary income (up to 13.3%), while Washington has a 7% tax on long-term gains above $250,000. Other states have lower or more limited taxes.

If you live in a state with no capital gains tax, you pay only the federal rate. If you live in California and sell an asset with a $100,000 long-term gain while in the top federal bracket, your combined federal and state tax could exceed 30%, whereas the same sale in a no-tax state would be 20% federal only. Where you live when you sell matters significantly.

What affects your capital gains tax bracket

Your capital gains tax rate is determined by your total taxable income for the year, not by the size of the gain alone. If you have a salary, self-employment income, retirement account withdrawals, or other income, all of that counts toward the threshold that determines your rate. A person with $30,000 in salary and a $50,000 capital gain is taxed differently than someone with no other income and the same $50,000 gain.

This is why the timing of a sale can matter. If you are planning to sell an asset, knowing your expected income for the year helps you decide whether to sell now or wait until next year when your income might be lower. Similarly, if you have a large capital gain, you might consider deferring other income (like bonuses or freelance work) to the following year to keep your total income lower.

Special situations: real estate and inherited assets

If you sell a primary residence, you may be able to exclude up to $250,000 of the gain from tax (or $500,000 if you are married filing jointly), provided you owned and lived in the home for at least two of the last five years. This exclusion applies only once every two years, and it is one of the largest tax breaks available to homeowners.

If you inherit an asset, you receive a stepped-up basis, meaning your cost basis is reset to the asset's value on the date of the person's death, not what they originally paid. This can eliminate or greatly reduce the capital gains tax you would owe if you sell the asset shortly after inheriting it. This rule applies to most inherited assets, including real estate, stocks, and other investments.

Frequently Asked Questions

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

No, you do not owe tax on a loss. Instead, you can use the loss to offset capital gains from other sales in the same year. If your losses exceed your gains, you can deduct up to $3,000 against other income, and carry any remaining loss forward to future years.

What is the difference between short-term and long-term capital gains?

Short-term gains are from assets held one year or less and are taxed as ordinary income (10% to 37%). Long-term gains are from assets held over one year and are taxed at lower rates (0%, 15%, or 20%). The difference can save you thousands on the same sale.

How do I know what my cost basis is?

Your cost basis is what you originally paid for the asset, plus any fees or commissions. For stocks, your broker provides this information. For real estate, it is the purchase price plus improvements. For inherited assets, the basis is reset to the value on the date of death.

Can I reduce my capital gains tax by timing the sale?

Yes. Selling in a year when your other income is lower may put you in a lower tax bracket. Waiting to hold an asset over one year qualifies it for long-term rates, which are significantly lower. Consulting a tax professional about your specific situation is worthwhile if you have a large gain.

Do I have to report capital gains if they are small?

Yes, you must report all capital gains on your tax return, regardless of size. The IRS receives reports from brokers and other financial institutions about sales you make, so unreported gains are likely to be caught during an audit.