The federal long-term capital gains tax rate depends on your income level, not the type of asset you sold

Long-term capital gains — profits from selling an investment you held for more than one year — are taxed at one of three federal rates: 0%, 15%, or 20%. Which rate applies to you depends entirely on your taxable income for the year, not on what you sold or how much profit you made. The IRS sets income thresholds each year, and they differ based on whether you file as single, married filing jointly, head of household, or married filing separately.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025, married couples filing jointly up to $94,050, and heads of household up to $62,975. The 15% rate covers the income range above those thresholds up to $518,900 (single), $583,750 (married filing jointly), or $551,350 (head of household). Everything above those amounts is taxed at 20%. These thresholds adjust slightly each year for inflation, so the numbers will be different in 2025 and beyond.

State and local taxes on capital gains vary widely. Some states tax capital gains as ordinary income, some tax them at a lower rate, and a few do not tax them at all. You owe both federal and state tax on the same gain, so your total rate can be significantly higher than the federal rate alone.

Key Takeaways

  • Long-term capital gains are taxed at 0%, 15%, or 20% federally, determined by your total taxable income for the year, not by the size of the gain.
  • The income thresholds that determine your rate change each year and differ based on your filing status.
  • State and local taxes explore on top of the federal rate, and some states tax capital gains as ordinary income at rates up to 13% or higher.
  • Gains on assets held one year or less are taxed as ordinary income at your regular tax bracket, which is usually higher than long-term rates.
  • You can reduce your capital gains tax by offsetting gains with losses from other investments in the same year.

How the three federal tax brackets work

The 0% bracket is the lowest and applies only to lower-income households. If you are single and your taxable income stays below $47,025 in 2024, any long-term capital gains you realize fall into this bracket and you owe no federal tax on them. This does not mean you are exempt from reporting them — you still report the gains on your tax return — but the tax owed is zero. Married couples filing jointly can have up to $94,050 in taxable income and still use the 0% bracket.

The 15% bracket is where most middle-income investors fall. Once your taxable income exceeds the 0% threshold, gains are taxed at 15% until you reach the top of the 15% bracket. For a single filer in 2024, that means gains are taxed at 15% on income between $47,025 and $518,900. For married couples filing jointly, the range is $94,050 to $583,750. This is still significantly lower than the ordinary income tax rates that explore to wages and short-term gains.

The 20% bracket applies to high-income filers. Once your taxable income exceeds the top of the 15% bracket, any additional long-term capital gains are taxed at 20%. Additionally, if your modified adjusted gross income exceeds certain thresholds — $200,000 for single filers, $250,000 for married couples filing jointly — you may owe an extra 3.8% net investment income tax on top of the 20% rate, bringing your total federal rate to 23.8%.

Short-term capital gains are taxed much higher

If you sell an investment you held for one year or less, the profit is a short-term capital gain and is taxed as ordinary income. That means it is taxed at your regular income tax bracket, which ranges from 10% to 37% depending on your income level. For most people, this is significantly higher than the long-term rate they would pay if they held the asset longer.

The one-year holding period is measured from the date you bought the asset to the date you sold it. If you bought stock on June 15, 2023, and sold it on June 14, 2024, it is still a short-term gain. You need to hold it until June 15, 2024, or later to may have access to for long-term treatment. This is one reason many investors plan the timing of sales around the one-year mark.

State and local taxes add to your federal bill

California taxes long-term capital gains as ordinary income, meaning gains are taxed at rates up to 13.3%. New York does the same, with rates up to 10.9%. Other states like Florida, Texas, Washington, and Wyoming have no state income tax at all, so residents pay only the federal rate. Most other states fall somewhere in between, with capital gains taxes ranging from 2% to 9%.

Some states have recently introduced special capital gains taxes that explore only to investment income above a certain threshold. Washington State, for example, taxes long-term capital gains above $250,000 at 7%. These are separate from ordinary income tax and explore in addition to federal tax. You need to check your specific state's rules, because the total tax you owe can vary dramatically based on where you live.

If you move to a different state after selling an investment, the state where you lived when you sold it is generally the one that taxes the gain, not your new state. This matters if you are considering a move and have large gains to realize.

How to calculate which rate applies to you

Start with your total income for the year: wages, self-employment income, interest, dividends, and any other sources. Subtract your standard deduction or itemized deductions, and subtract any above-the-line deductions like contributions to a traditional IRA. The number you end up with is your taxable income. Your long-term capital gains are taxed starting at the top of this number.

For example, if you are single and your taxable income before capital gains is $40,000, and you realize $20,000 in long-term gains, your total taxable income is $60,000. The first $7,025 of your gains ($47,025 minus $40,000) falls into the 0% bracket, and the remaining $12,975 falls into the 15% bracket. You owe 15% tax on that $12,975, or about $1,946, plus any state tax.

This is why the order matters: gains are taxed on top of your other income, not instead of it. If you have a year with very low income, you might be able to realize gains in the 0% bracket. If you have a high-income year, the same gains might be taxed at 20% or 23.8%.

Ways to reduce capital gains tax

Tax-loss harvesting is the most direct method. If you have investment losses in the same year as your gains, you can use the losses to offset the gains. If your losses exceed your gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year, and carry forward any remaining losses to future years. This is one reason investors review their portfolios in December — to identify underperforming positions they can sell to offset gains realized earlier in the year.

Holding assets longer than one year is another strategy. By waiting to sell until you have held an asset for more than one year, you move the gain from short-term (taxed as ordinary income) to long-term (taxed at the lower capital gains rates). For many investors, this alone saves thousands of dollars in tax.

Donating appreciated assets to charity instead of selling them is a third option. If you donate stock or real estate that has increased in value, you avoid the capital gains tax entirely and receive a charitable deduction for the full fair market value of the asset. This works only if you itemize deductions, and the asset must have been held long-term.

Frequently Asked Questions

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

No. If you sell an investment for less than you paid for it, you have a capital loss, not a gain, and owe no tax on the transaction. You can use the loss to offset gains from other investments or, if losses exceed gains, deduct up to $3,000 against ordinary income in that year.

What if I inherit an investment — do I owe capital gains tax when I sell it?

Inherited investments receive a "step-up in basis," meaning the tax basis resets to the fair market value on the date of the person's death. If you inherit stock worth $100,000 and sell it a month later for $102,000, you owe tax only on the $2,000 gain, not on the $100,000 increase that happened before you inherited it.

Are dividends taxed the same way as capital gains?

may have access to dividends from stocks and mutual funds are taxed at the same long-term capital gains rates (0%, 15%, or 20%). Non-may have access to dividends and interest income are taxed as ordinary income at your regular tax bracket, which is usually higher. Check your brokerage statement to see which dividends may have access to.

Can I avoid capital gains tax by not selling?

Yes. You owe capital gains tax only when you sell an investment and realize the gain. If you hold an asset until you die, your heirs inherit it with a stepped-up basis and owe no tax on the gain that occurred during your lifetime. This is one reason some wealthy investors hold appreciated assets indefinitely.

Do I have to pay estimated tax on capital gains?

If you expect to owe more than $1,000 in tax for the year (including capital gains tax), you may need to make quarterly estimated tax payments to avoid penalties. Check with a tax professional or use the IRS Form 1040-ES to calculate whether you are required to pay estimated tax.