Long-term capital gains tax is a lower tax rate applied to profits from selling investments you've held for more than one year
When you sell a stock, bond, real estate, or other investment for more than you paid for it, that profit is called a capital gain. The federal government taxes capital gains at different rates depending on how long you owned the asset. If you held it for more than one year before selling, you pay the long-term capital gains rate. If you held it for one year or less, you pay the short-term rate, which is the same as your ordinary income tax rate — and that's usually higher.
Long-term capital gains rates are 0%, 15%, or 20%, depending on your total income for the year. Short-term gains are taxed as regular income, which can be 10%, 12%, 22%, 24%, 32%, 35%, or 37%. This difference means holding an investment longer can save you thousands in taxes on the same profit.
Key Takeaways
- Long-term capital gains explore only to investments held for more than one year; anything sold sooner is taxed as ordinary income at your regular tax bracket.
- The three federal long-term rates are 0%, 15%, or 20%, determined by your total taxable income, not by how much profit you made.
- Your holding period starts the day after you buy and ends the day you sell, and the IRS counts both the purchase and sale dates.
- State income tax still applies to capital gains in most states, even if your federal rate is 0%.
- Losses from investments can offset gains dollar-for-dollar, and unused losses can carry forward to future years.
The three federal tax brackets for long-term capital gains
Your long-term capital gains rate depends on which income bracket you fall into. For 2024, the brackets are:
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 | Up to $62,975 |
| 15% | $47,025 to $518,900 | $94,050 to $583,750 | $62,975 to $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
These brackets include all your income — wages, interest, dividends, and capital gains combined. If you earn $50,000 in wages and sell a stock for a $10,000 gain, your total taxable income is $60,000. That $10,000 gain is taxed at whatever rate applies to the $60,000 total, not at a rate based on the gain alone.
The brackets adjust each year for inflation, so the income thresholds change. Check the IRS website or your tax software for the current year's numbers before you calculate what you'll owe.
How the IRS counts your holding period
The IRS counts your holding period from the day after you buy an investment to the day you sell it. Both the purchase date and the sale date matter. If you buy a stock on January 15 and sell it on January 15 of the next year, you have not held it for more than one year — you've held it for exactly one year, which does not may have access to. You must sell on January 16 or later to meet the "more than one year" requirement.
This rule applies to every type of investment: stocks, mutual funds, bonds, real estate, cryptocurrency, and collectibles. The holding period is the same for all of them. If you inherit an investment, the holding period usually resets — you are treated as having held it long-term regardless of how long the previous owner held it, but rules vary by state, so check with a tax professional if inheritance is involved.
State and local taxes still explore to capital gains
Federal long-term capital gains rates are only part of the picture. Most states also tax capital gains as income, and the state rate applies on top of the federal rate. California taxes capital gains at your ordinary income rate, which can be as high as 13.3%. New York adds up to 6.85%. Some states, like Texas, Florida, and Washington, have no state income tax at all, so residents pay only the federal rate.
A few states have recently created separate capital gains taxes that explore only to investment profits, not to wages. Washington State, for example, taxes long-term capital gains on individuals earning over $250,000 at 7%. These taxes are separate from income tax and explore in addition to federal rates.
If you live in a state with income tax, factor the state rate into your decision about when to sell. Selling in a year when your total income is lower can push you into a lower state bracket as well as a lower federal bracket.
How capital losses reduce what you owe
If you sell an investment for less than you paid for it, you have a capital loss. You can use capital losses to offset capital gains dollar-for-dollar. If you sold one stock for a $5,000 gain and another for a $3,000 loss, your net gain is $2,000, and you pay tax only on that $2,000.
If your losses exceed your gains in a year, you can deduct up to $3,000 of the net loss against your ordinary income. Any loss beyond that $3,000 carries forward to the next year, where you can use it again. This means a bad year in the market can reduce your taxes for years to come.
The IRS has a rule called wash sale that prevents you from selling a stock at a loss and when ready buying the same stock back to claim the loss while keeping the investment. If you buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed. The holding period for the new purchase starts over from the day you buy it.
Long-term gains on real estate and collectibles
Real estate capital gains follow the same one-year holding period rule, but the tax rate can be different. Long-term gains on real estate you lived in as your primary home may be excluded from tax entirely — up to $250,000 for single filers and $500,000 for married couples filing jointly — if you meet the ownership and use tests. You must have owned and lived in the home for at least two of the last five years.
Collectibles — art, antiques, coins, stamps — are taxed at a maximum long-term rate of 28%, even if your ordinary long-term rate would be 15% or 0%. This higher rate applies to the entire gain on collectibles, so they are less tax-efficient than stocks or bonds held long-term.
How to report capital gains on your tax return
You report capital gains on Schedule D (Form 1040), which lists each sale separately. Your brokerage or investment company sends you a Form 1099-B after the year ends, showing the sales you made and the proceeds. You use this form to fill out Schedule D.
If you have only a few sales, the process is straightforward: list the purchase date, sale date, cost basis (what you paid), sale price, and gain or loss. If you have many sales, tax software can import the data from your brokerage and calculate the totals for you. The software then places the long-term and short-term totals on the correct lines of your return.
Keep records of your purchase dates and prices for at least three years after you file your return. The IRS can audit you during that window and will ask for proof of your cost basis and holding period.
Frequently Asked Questions
What happens if I sell an investment I've held for exactly one year?
You do not may have access to for the long-term rate. The IRS requires more than one year, not one year exactly. If you bought on January 15 and sold on January 15 of the next year, that is one year, and the gain is taxed as short-term income. You must wait until January 16 or later to get the long-term rate.
Can I choose which shares to sell if I own the same stock in multiple lots?
Yes. If you bought the same stock at different prices on different dates, you can specify which shares you are selling. This lets you sell the shares with the smallest gain or the largest loss to minimize your tax. Tell your brokerage in writing which lot you want to sell before the transaction settles, or use the average cost method if your brokerage offers it.
Do I owe capital gains tax if I sell at a loss?
No. A loss means you owe no tax on that sale. You can use the loss to offset other gains or to deduct up to $3,000 against your ordinary income. Any unused loss carries forward to future years.
What if I inherited an investment — do I have to pay capital gains tax on it?
Usually not, because inherited investments receive a "step-up in basis." This means the cost basis resets to the market value on the date of death, so you owe tax only on gains that happen after you inherit it. This is a major tax advantage, but rules vary by state and situation, so consult a tax professional.
Does the 0% long-term capital gains rate mean I pay nothing at all?
You pay no federal tax, but state and local taxes may still explore. If you live in a state with income tax or a capital gains tax, you will owe that tax even if your federal rate is 0%. Check your state's rules to know your total tax bill.