What the federal capital gains tax is

The federal capital gains tax is a tax on the profit you make when you sell an asset for more than you paid for it. The asset can be a stock, a house, land, a business, or anything else of value. The difference between what you paid and what you sold it for is your capital gain, and that gain is taxable income at the federal level.

You do not pay tax on the asset itself — only on the profit. If you buy a stock for $1,000 and sell it for $1,200, your capital gain is $200, and that $200 is what gets taxed. If you sell it for less than you paid, you have a capital loss, which can reduce other taxable income.

Capital gains tax rates are different from ordinary income tax rates. The rate you pay depends on how long you held the asset and how much total income you earned that year. This is one of the biggest differences between capital gains and wages or salary.

Key Takeaways

  • Capital gains are profits from selling assets like stocks, real estate, or businesses, and they are taxed at the federal level.
  • Long-term capital gains (assets held over one year) are taxed at lower rates — 0%, 15%, or 20% — depending on your income level.
  • Short-term capital gains (assets held one year or less) are taxed as ordinary income at your regular tax bracket rate.
  • You report capital gains on your federal tax return using Schedule D, and you only owe tax when you actually sell the asset, not when it gains value.

Long-term versus short-term capital gains

The length of time you own an asset determines which tax rate applies. If you hold an asset for more than one year before selling it, the gain is long-term. If you sell it within one year, the gain is short-term.

Long-term capital gains receive preferential tax treatment. The federal rates are 0%, 15%, or 20%, depending on your total taxable income for the year. These rates are significantly lower than ordinary income tax rates, which go up to 37% at the highest bracket.

Short-term capital gains are taxed as ordinary income. That means they are added to your wages, salary, and other income, and taxed at whatever bracket you fall into. For someone in the 24% tax bracket, a short-term capital gain is taxed at 24%. For someone in the 32% bracket, it is taxed at 32%.

This difference is why investors often hold assets longer than one year when possible — the tax savings can be substantial.

How long-term capital gains rates work

The three long-term rates — 0%, 15%, and 20% — are tied to income thresholds that change each year. The thresholds are different for single filers, married filing jointly, and head of household.

For 2024, a single filer pays 0% on long-term gains if their total taxable income is below $47,025. From $47,025 to $518,900, the rate is 15%. Above $518,900, the rate is 20%. For married couples filing jointly, the 0% threshold is higher, and so are the other brackets.

These thresholds are adjusted annually for inflation, so the numbers change from year to year. You can find the current year's thresholds on the IRS website or in the instructions to Schedule D when you file your return.

The key point is that your long-term capital gains rate depends on your total income for the year, not just the size of the gain. If you have a large capital gain that pushes you into a higher bracket, part of the gain may be taxed at 15% and part at 20%.

When you owe capital gains tax

You owe federal capital gains tax only when you sell the asset. straightforward owning an asset that increases in value does not trigger a tax bill. A stock that doubles in price while you hold it creates no tax liability until you sell it.

The moment you sell, you have a taxable event. Your broker or the buyer will report the sale to the IRS, and you must report it on your tax return. If you fail to report it, the IRS will likely catch the discrepancy and send you a bill.

The tax is due when you file your federal return, typically by April 15 of the following year. If you sell an asset late in the year, you do not owe the tax until the next April.

Capital losses and how they reduce your tax bill

If you sell an asset for less than you paid for it, you have a capital loss. Capital losses can be used to offset capital gains, reducing the amount of gain you owe tax on.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income. Any loss beyond $3,000 carries forward to future years, where you can use it to offset future gains or ordinary income.

This is why some investors deliberately sell losing positions at the end of the year — a practice called tax-loss harvesting. By realizing losses, they reduce their overall tax bill for the year.

How to report capital gains on your tax return

You report capital gains and losses on Schedule D, which is part of your federal Form 1040. Schedule D has two sections: one for short-term gains and losses, and one for long-term gains and losses.

Your broker will send you a Form 1099-B showing all the sales you made during the year, including the purchase price, sale price, and date held. You use this form to fill out Schedule D. If you sold real estate, you may receive a Form 1099-S instead.

After you complete Schedule D, the net gain or loss flows to your Form 1040. If you have a net gain, it is added to your income. If you have a net loss, it reduces your income (up to the $3,000 annual limit for ordinary income).

If you have no capital gains or losses, you do not need to file Schedule D at all.

State and local capital gains taxes

The federal capital gains tax is separate from state and local taxes. Some states tax capital gains as ordinary income, some tax them at a lower rate, and some do not tax them at all.

Washington state, for example, has a capital gains tax on long-term gains from the sale of certain assets like stocks and bonds, but not on real estate. California taxes capital gains as ordinary income. Texas, Florida, and several other states have no capital gains tax at all.

If you live in a state with a capital gains tax, you will owe both the federal tax and the state tax on your gains. Your total tax bill depends on where you live.

Frequently Asked Questions

Do I owe capital gains tax if I inherit an asset?

No. When you inherit an asset, you receive what is called a stepped-up basis. This means the asset's value is reset to what it was worth on the date of death, and you do not owe tax on any gain that occurred before you inherited it. You only owe tax on gains that happen after you inherit it.

What if I sell my house — do I pay capital gains tax?

Most homeowners do not. If you are single, you can exclude up to $250,000 of gain from the sale of your primary residence. If you are married filing jointly, you can exclude up to $500,000. You must have owned and lived in the home for at least two of the last five years. Gains above the exclusion amount are taxed as long-term capital gains.

Can I deduct investment losses from my paycheck?

Only up to $3,000 per year. If you have more than $3,000 in net capital losses, the excess carries forward to future years. You can use it to offset future gains or future ordinary income, but you cannot deduct more than $3,000 of ordinary income in any single year.

Do I owe capital gains tax on cryptocurrency?

Yes. The IRS treats cryptocurrency as property, not currency. When you sell it for a profit, that profit is a capital gain and is taxed the same way as stock gains — at long-term or short-term rates depending on how long you held it.

What happens if I do not report a capital gain?

Your broker reports the sale to the IRS on Form 1099-B, so the IRS knows about it. If you do not report it on your return, the IRS will send you a notice and a bill for the unpaid tax, plus interest and penalties. It is much cheaper to report the gain when you file.