What Long-Term Capital Gains Tax Is

Long-term capital gains tax is the tax you owe when you sell an investment—a stock, rental property, or other asset—that you have owned for more than one year and it has increased in value. The tax applies only to the profit, not the full sale price. The rate you pay depends on your income level and filing status, and it is usually lower than the tax rate on regular income.

The federal government taxes long-term gains at three rates: 0%, 15%, or 20%. Which rate applies to you depends on your taxable income for that year. Most people fall into the 15% bracket. Some states also charge their own capital gains tax on top of the federal tax, though the rules vary widely by state.

Key Takeaways

  • Long-term capital gains are taxed at 0%, 15%, or 20% at the federal level, depending on your total taxable income and filing status for that year.
  • You only pay tax on the profit—the difference between what you paid for the asset and what you sold it for—not the full sale price.
  • The asset must be held for more than one year to may have access to for long-term rates; if you sell within one year, it is taxed as short-term gain at your regular income tax rate.
  • Some states impose their own capital gains tax, and the rate or threshold varies by state.
  • You report long-term capital gains on Schedule D of your federal tax return, which you file with Form 1040.

The Three Federal Tax Rates and Income Thresholds

The 0% rate applies to people with lower incomes. For 2024, if you are single and your taxable income is $47,025 or less, long-term gains fall into the 0% bracket. If you are married filing jointly, the threshold is $94,050. This means you owe no federal tax on those gains.

The 15% rate covers most taxpayers. For single filers, it applies to taxable income between $47,025 and $518,900. For married couples filing jointly, it applies between $94,050 and $583,750. This is the bracket where the majority of people with investment income land.

The 20% rate applies to the highest earners. For single filers, it kicks in above $518,900 of taxable income; for married couples, above $583,750. These thresholds change slightly each year based on inflation.

Your taxable income is not the same as your total income. It is what remains after you subtract deductions and adjustments. The capital gains rate that applies to you depends on where your total taxable income falls, not just the size of the gain itself.

Long-Term vs. Short-Term Capital Gains

The holding period matters. If you own an asset for one year or less before selling it, the profit is a short-term capital gain, and it is taxed at your ordinary income tax rate—the same rate as your wages or salary. This can be as high as 37% for top earners.

If you own the asset for more than one year, it is a long-term capital gain, and it receives the preferential rates of 0%, 15%, or 20%. The difference can be substantial. For example, if you are in the 24% income tax bracket and sell a stock you held for 11 months, you pay 24% on the gain. If you hold that same stock for 13 months, you pay only 15%.

The IRS counts the holding period from the day after you buy the asset to the day you sell it. If you buy on January 15 and sell on January 16 of the following year, it qualifies as long-term.

How to Calculate Your Capital Gain

The gain is the sale price minus your cost basis. Cost basis is usually what you paid for the asset, including any fees or commissions. If you bought 100 shares of stock at $50 per share plus a $10 commission, your cost basis is $5,010.

If you sell those 100 shares for $7,000, your capital gain is $7,000 minus $5,010, which equals $1,990. You owe tax only on that $1,990, not on the full $7,000 sale price.

Cost basis can be more complex if you inherited the asset, received it as a gift, or bought it over time. If you inherited stock, your cost basis is typically its value on the date of the person's death, not what they originally paid. If you received a gift, your cost basis is usually what the giver paid, unless the asset had declined in value at the time you received it.

State Capital Gains Taxes

Most states do not tax capital gains separately. However, some states treat capital gains as regular income and tax them at their ordinary income tax rate. A few states have created their own capital gains tax on top of income tax.

California, for example, taxes long-term capital gains as ordinary income at rates up to 13.3%. Washington state has a 7% capital gains tax on the sale of long-term capital assets worth more than $250,000. New York taxes capital gains as regular income. If you live in a state with no income tax—such as Florida, Texas, or Wyoming—you owe no state capital gains tax.

If you sell an asset and move to a different state, the state where you lived when you sold it typically claims the tax, not the state you move to afterward.

Reporting Capital Gains on Your Tax Return

You report long-term capital gains on Schedule D, which is part of your federal tax return filed with Form 1040. Schedule D asks you to list each asset you sold, the date you bought it, the date you sold it, your cost basis, the sale price, and the gain or loss.

If you have only a few transactions, you can fill out Schedule D by hand. If you have many, tax software or a tax preparer can help you organize the information. Your brokerage or investment company sends you a statement showing the sales and cost basis for assets sold during the year; you use this to fill out Schedule D.

If your total capital gains exceed your total capital losses for the year, you report the net gain on Schedule D and carry it to Form 1040. If you have losses that exceed gains, you can deduct up to $3,000 of the net loss against other income in that year, and carry forward any remaining loss to future years.

Common Situations and How They Are Taxed

If you sell a primary residence, you may not owe tax on the gain at all. The IRS allows you to exclude up to $250,000 of gain if you are single, or $500,000 if you are married filing jointly, as long as you owned and lived in the home for at least two of the last five years.

If you sell a rental property or investment real estate, the entire gain is subject to capital gains tax. You cannot use the primary residence exclusion. Additionally, a portion of the gain may be subject to a 3.8% net investment income tax if your modified adjusted gross income exceeds certain thresholds ($200,000 for single filers, $250,000 for married couples filing jointly).

If you sell mutual funds or exchange-traded funds held in a regular brokerage account, each sale is a separate taxable event. If you hold the fund for more than one year, the gain is long-term. If you hold it for one year or less, it is short-term. Funds held in retirement accounts like a 401(k) or IRA do not trigger capital gains tax when you sell them inside the account; you pay tax only when you withdraw money from the account.

Frequently Asked Questions

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

No, you do not owe tax on a loss. Instead, you can use the loss to reduce any capital gains you had that year. If losses exceed gains, you can deduct up to $3,000 of the net loss against your regular income. Any remaining loss carries forward to future years.

What if I inherit stock or property—do I owe capital gains tax when I sell it?

Your cost basis for inherited assets is their value on the date of death, not what the original owner paid. If you sell the asset shortly after inheriting it for roughly the same value, you owe little or no capital gains tax. This is called a "step-up in basis" and is one of the main tax benefits of inheritance.

Do I have to pay capital gains tax if I reinvest the money?

Yes. The tax is due on the gain itself, regardless of what you do with the sale proceeds. Reinvesting the money does not reduce or defer the tax owed in that year.

How do I know if my state taxes capital gains?

Check your state's revenue or tax department website. Most states tax capital gains as part of regular income tax. A few have separate capital gains taxes. Some have no income tax at all. Your tax software or preparer can also tell you what your state requires.

Can I avoid capital gains tax by holding an asset longer?

Holding an asset longer than one year qualifies it for the lower long-term rate instead of the higher short-term rate, but you cannot avoid the tax entirely. The tax is due whenever you sell, regardless of how long you held it.