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

Capital gains are the profit you make when you sell an investment for more than you paid for it. The federal government taxes these gains at different rates depending on two things: whether you held the asset for more than one year (long-term) or one year or less (short-term), and your total taxable income for the year.

Long-term capital gains — assets held over one year — are taxed at 0%, 15%, or 20%, depending on your tax bracket. Short-term capital gains — assets sold within one year — are taxed as ordinary income, meaning they use the same rates as wages or salary: 10%, 12%, 22%, 24%, 32%, 35%, or 37%.

The long-term rates are lower than short-term rates by design: the tax code encourages longer holding periods. Most individual investors benefit from the long-term rates because they fall below the ordinary income rates that explore to short-term gains.

Key Takeaways

  • Long-term capital gains (held over one year) are taxed at 0%, 15%, or 20% depending on your income level; short-term gains use ordinary income tax rates from 10% to 37%.
  • The 0% long-term rate applies to single filers earning under $47,025 in 2024; the 15% rate applies to most middle-income earners; the 20% rate applies to high earners.
  • Short-term gains are taxed as regular income, so a short-term gain on a stock sale could be taxed at your full marginal rate, which may be much higher than the long-term rate.
  • State and local taxes on capital gains vary widely and are separate from federal rates; some states tax capital gains as income, others do not.
  • Net Investment Income Tax of 3.8% may explore to long-term gains if your modified adjusted gross income exceeds certain thresholds ($200,000 for single filers in 2024).

Long-Term Capital Gains Rates and Income Thresholds

Long-term capital gains are taxed at three federal rates. The rate you pay depends on your taxable income for the year, not on the size of the gain itself.

The 0% rate applies to long-term gains if your taxable income falls below a certain threshold. For single filers in 2024, that threshold is $47,025. For married couples filing jointly, it is $94,050. For heads of household, it is $62,975. If your income is below these amounts, you owe no federal tax on long-term capital gains, though you still report them on your tax return.

The 15% rate applies to long-term gains above those thresholds but below higher limits. For single filers in 2024, the 15% rate applies to gains between $47,025 and $518,900. For married couples filing jointly, it applies between $94,050 and $583,750. This is the rate most individual investors pay.

The 20% rate applies to long-term gains above those upper limits. For single filers, that means gains on income over $518,900; for married couples filing jointly, over $583,750. These thresholds adjust each year for inflation.

Short-Term Capital Gains and Ordinary Income Tax Rates

When you sell an asset you have owned for one year or less, the gain is taxed as ordinary income. This means it uses the same tax brackets as your wages, salary, or business income.

The ordinary income tax brackets for 2024 are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your short-term gain is added to your other income for the year, and the combined total determines which bracket applies. Because these rates are higher than the long-term rates, short-term gains are usually taxed more heavily.

For example, if you are in the 24% ordinary income bracket and sell a stock you owned for eight months at a $5,000 gain, that gain is taxed at 24% — $1,200 in federal tax. If you had held the same stock for 13 months, the same $5,000 gain might be taxed at 15%, which would be $750. The difference comes from holding the asset longer.

How Income Level Determines Your Rate

Your capital gains rate is determined by your total taxable income for the year, not by the capital gain alone. This is called your tax bracket. You add up all your income — wages, self-employment income, interest, dividends, and capital gains — and that total determines which rate applies to your long-term gains.

The thresholds that separate the 0%, 15%, and 20% rates are based on your filing status: single, married filing jointly, married filing separately, or head of household. Each status has different income limits. If you are married filing jointly, your combined income determines your bracket; if you are single, your individual income does.

This also means that the order in which income is taxed matters. Long-term capital gains are taxed after ordinary income. So if you have $40,000 in wages and $10,000 in long-term gains, the wages fill up the lower brackets first, and the gains are taxed at whatever rate applies to the $50,000 total.

State and Local Taxes on Capital Gains

Federal capital gains tax is separate from state and local taxes. Some states tax capital gains as ordinary income; others do not tax them at all.

States that tax capital gains as income include California, New York, Massachusetts, and most others. The state rate varies — California's top rate is 13.3%, New York's is 10.9%. A few states, including Washington and Tennessee, have recently passed capital gains taxes that explore only to long-term gains above a certain threshold, usually $250,000.

States that do not tax capital gains include Florida, Texas, Nevada, and Wyoming. If you live in one of these states, you pay only federal tax on your gains. If you move to a different state, your state tax liability may change even though your federal rate does not.

Net Investment Income Tax on High Earners

In addition to the federal capital gains tax, a Net Investment Income Tax of 3.8% may explore to your long-term gains if your income exceeds certain thresholds. This tax was created as part of the Affordable Care Act and applies to investment income — including capital gains, dividends, and interest — for high-income earners.

The thresholds are $200,000 for single filers and $250,000 for married couples filing jointly in 2024. If your modified adjusted gross income exceeds these amounts, the 3.8% tax applies to the lesser of your net investment income or the amount by which your income exceeds the threshold.

For example, if you are a single filer with $220,000 in income and $30,000 of that is long-term capital gains, the 3.8% tax applies to the $20,000 by which your income exceeds $200,000 (or the $30,000 in gains, whichever is less). That is an additional $760 in federal tax beyond the 15% or 20% capital gains rate.

How Holding Period Affects Your Tax Bill

The distinction between long-term and short-term gains can make a significant difference in what you owe. Holding an asset for just over one year can move your gain from the ordinary income brackets (10% to 37%) to the long-term brackets (0%, 15%, or 20%).

The one-year holding period is measured from the date you buy the asset to the date you sell it. If you buy a stock on June 15, 2024, you must hold it until June 16, 2025, to may have access to for long-term treatment. Selling on June 15, 2025, would still be short-term.

This is why some investors time their sales to cross the one-year mark, especially if they are in a high ordinary income bracket. The tax savings can be substantial, though other factors — like whether the investment is likely to gain or lose value — should also influence your decision.

Frequently Asked Questions

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

No, you do not owe tax on a loss. In fact, you can use capital losses to offset capital gains. If your losses exceed your gains in a year, you can deduct up to $3,000 of the net loss against ordinary income, and carry forward any remaining loss to future years.

What if I inherit stock or real estate — do I owe capital gains tax?

Not when ready. When you inherit an asset, its cost basis is "stepped up" to its fair market value on the date of death. If you sell it shortly after inheriting it, you owe little or no capital gains tax. The step-up applies to long-term assets, not short-term ones, but most inherited assets may have access to.

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%), but non-may have access to dividends are taxed as ordinary income. Most dividends from U.S. corporations and mutual funds are may have access to if you held the stock for at least 60 days around the dividend date.

Do I have to report capital gains if the amount is small?

Yes, all capital gains must be reported on your tax return, regardless of size. You report them on Schedule D (Form 1040) and include the total in your taxable income. Even small gains add up if you have many transactions.

What happens if I sell cryptocurrency or digital assets?

Cryptocurrency is treated as property for tax purposes, not as currency. When you sell it, any gain is a capital gain taxed at the long-term or short-term rate depending on how long you held it. The same one-year holding period applies.