Capital gains tax is a tax on profit when you sell an asset for more than you paid for it
When you sell a stock, rental property, or other investment and make money on the sale, that profit is called a capital gain. The federal government taxes this profit at rates that depend on how long you held the asset and how much total income you earned that year. The rate is not the same for everyone—it changes based on your tax bracket and whether the gain is short-term or long-term.
Most people pay either 0%, 15%, or 20% on long-term capital gains (assets held over one year). Short-term gains (assets held one year or less) are taxed as ordinary income, which means they use your regular income tax brackets and can go as high as 37%. Your state may also charge its own capital gains tax on top of the federal rate.
Key Takeaways
- Long-term capital gains use three federal rates—0%, 15%, or 20%—based on your income level, while short-term gains are taxed at your ordinary income tax rate.
- You must hold an asset for more than one year for it to may have access to as a long-term gain; anything sold within one year is taxed as short-term.
- Your total income for the year determines which tax bracket you fall into, and that bracket determines your capital gains rate.
- Some states charge their own capital gains tax in addition to federal tax, while others do not tax capital gains at all.
- The IRS requires you to report all capital gains on your tax return, and your broker will send you a Form 1099-B showing what you sold.
Long-term vs. short-term capital gains rates
The holding period is the first thing that determines your rate. If you own an asset for more than one year before selling it, any profit is a long-term capital gain. If you sell within one year, it is a short-term capital gain. The difference in tax cost is usually large.
Long-term capital gains are taxed at preferential rates: 0%, 15%, or 20% depending on your income. Short-term capital gains are taxed as ordinary income, which means they use the same brackets as wages or salary—up to 37% at the highest bracket. For most people, this makes a huge difference. Someone in the 24% income tax bracket might pay only 15% on a long-term gain but 24% on a short-term gain from the same dollar amount of profit.
How your income level determines your capital gains rate
The IRS sets income thresholds each year that determine whether you pay 0%, 15%, or 20% on long-term gains. These thresholds are different for single filers, married filing jointly, and heads of household. For 2024, the 0% rate applies to single filers with taxable income up to $47,025, and the 15% rate applies to those earning between $47,025 and $518,900. Income above that is taxed at 20%.
For married couples filing jointly in 2024, the 0% rate goes up to $94,050, the 15% rate extends to $583,750, and anything above that is 20%. These numbers change each year because the IRS adjusts them for inflation. Your taxable income includes wages, interest, dividends, and capital gains added together—so a large capital gain can push you into a higher bracket even if your salary stayed the same.
This is why timing matters. If you are close to a threshold, selling in a year when your other income is lower might keep you in the 0% or 15% bracket instead of jumping to 20%.
State capital gains taxes
On top of federal tax, some states charge their own capital gains tax. California, Oregon, Washington, New Jersey, Illinois, and Vermont all tax capital gains at the state level. The rates and rules vary widely. Washington, for example, taxes long-term capital gains on the sale of stocks and certain other assets at a flat 7% rate. California taxes capital gains as ordinary income, so the rate depends on your state income tax bracket, which can reach 13.3%.
Other states—including Florida, Texas, Wyoming, and South Dakota—do not tax capital gains at all. If you live in a state with no capital gains tax, you only owe federal tax. If you move to a different state in the year you sell an asset, the state where you lived when you sold it is generally the one that can tax the gain, though the rules can be complex if you are relocating.
How to report capital gains on your tax return
When you sell an investment, your broker sends you a Form 1099-B by January 31 showing what you sold, when you sold it, and the sale price. You use this form to calculate your gain or loss. The gain is the sale price minus what you originally paid (your cost basis), minus any fees or commissions.
You report long-term capital gains on Schedule D of your Form 1040. Short-term gains also go on Schedule D but are treated differently for tax purposes. If you have losses—selling something for less than you paid—you can use those losses to offset gains, and you can carry unused losses forward to future years. Many people use tax software or a tax professional to handle this because the rules around cost basis, holding periods, and loss carryovers can get complicated, especially if you have multiple sales in one year.
Special situations: collectibles and real estate
Most long-term capital gains get the preferential 0%, 15%, or 20% rates. But collectibles—art, coins, stamps, and similar items—are taxed at a maximum rate of 28% even if they are long-term gains. This is higher than the standard long-term rate and can catch people off guard.
Real estate is also treated differently in some ways. If you sell a primary residence and meet certain conditions (you owned it and lived in it for at least two of the last five years), you can exclude up to $250,000 of gain if you are single, or $500,000 if married filing jointly. This exclusion is available once every two years. Rental property or investment real estate does not get this exclusion, so the full gain is taxable at your capital gains rate.
What happens if you do not report a capital gain
Your broker reports the sale to the IRS on Form 1099-B, so the IRS knows about it even if you do not report it on your return. If you do not report a gain, the IRS will likely send you a notice asking for the tax owed, plus interest and penalties. The penalty for underreporting income is usually 20% of the underpaid tax, and interest compounds daily. It is much cheaper to report the gain correctly the first time.
If you made a loss instead of a gain, you still report it, because losses can reduce your taxable income. You can deduct up to $3,000 of net capital losses against ordinary income in a single year, and carry any remaining losses forward indefinitely.
Frequently Asked Questions
Do I owe capital gains tax if I reinvest the money?
Yes. The tax is based on the profit you made, not on what you do with the money afterward. Whether you spend it, reinvest it, or leave it in a bank account does not change the tax you owe. The IRS taxes the gain in the year you sell the asset.
What if I sell at a loss?
You do not owe tax on a loss; instead, you can use it to reduce your taxable gains or income. You can deduct up to $3,000 of net losses against ordinary income per year. Any losses beyond that carry forward to future years and can be used to offset future gains or income.
How do I know my cost basis if I inherited stock?
Inherited assets receive a "step-up in basis," meaning your cost basis is the fair market value on the date the person died, not what they originally paid. This can significantly reduce or eliminate the taxable gain if you sell soon after inheriting. Your broker or the estate executor can help you determine the stepped-up basis.
Can I avoid capital gains tax by holding an asset forever?
You avoid tax only if you never sell. Once you sell, you owe tax on the gain. If you hold until death, your heirs receive the step-up in basis and can sell without owing tax on the gain that happened during your lifetime. This is one reason some people hold appreciated assets long-term.
Do I owe capital gains tax on cryptocurrency?
Yes. The IRS treats cryptocurrency like any other asset. If you sell Bitcoin or another coin for more than you paid, that profit is a capital gain subject to the same rates and rules as stocks or real estate. You must report it on your tax return.