Capital gains tax rates depend on how long you held the asset and your income level

Capital gains tax is the tax on profit when you sell an investment like stocks, real estate, or cryptocurrency for more than you paid. The rate you pay is either 0%, 15%, or 20% — but only on the profit itself, not the full sale price. The rate depends on two things: whether you held the asset for more than one year (long-term) or less (short-term), and your total taxable income for that year.

Short-term capital gains — assets you owned for one year or less — are taxed as ordinary income. That means the rate matches your regular income tax bracket, which ranges from 10% to 37% depending on how much you earned that year. Long-term capital gains, for assets held over one year, get preferential rates: 0%, 15%, or 20%. Most people pay 15%. The 0% rate applies only if your income is below a certain threshold; the 20% rate applies only at the highest income levels.

Key Takeaways

  • Long-term capital gains (held over one year) are taxed at 0%, 15%, or 20%; short-term gains are taxed as ordinary income at rates up to 37%.
  • Your capital gains rate depends on your total taxable income for the year, not just the profit from the sale.
  • You report capital gains on Schedule D of your tax return; the IRS matches your sale records to what you report.
  • State capital gains taxes vary widely — some states have no capital gains tax, while others tax it like regular income.
  • Losses on investments can offset gains, reducing the amount of profit you owe tax on.

Long-term capital gains rates: 0%, 15%, or 20%

If you held an investment for more than one year before selling, the profit qualifies for long-term rates. For 2024, the 0% rate applies if your taxable income is below $47,025 (single) or $94,050 (married filing jointly). The 15% rate applies to income above those thresholds up to $518,900 (single) or $583,750 (married). Anything above those amounts is taxed at 20%.

These income thresholds change each year with inflation. The IRS publishes updated brackets in January. If you are near a threshold, timing the year you sell can matter — selling in a lower-income year might drop you into the 0% or 15% bracket instead of 20%.

Short-term capital gains are taxed like regular income

If you held an investment for one year or less, any profit is a short-term capital gain and is taxed at your ordinary income tax rate. For 2024, those rates range from 10% to 37% depending on your total income. A person in the 24% income bracket pays 24% on short-term gains, not 15%.

This is why holding an investment just over one year can save significant tax. A $10,000 profit taxed at 37% (short-term) costs $3,700 in federal tax. The same profit taxed at 20% (long-term, highest rate) costs $2,000. The difference is $1,700.

How the IRS knows what you sold and when

When you sell stocks, bonds, or cryptocurrency through a broker, the broker sends you a Form 1099-B and also sends a copy to the IRS. The form shows the sale price, the date you bought it, and the date you sold it. The IRS uses this to verify that you reported the sale correctly on your tax return.

Real estate sales are reported on Form 8949 and Schedule D. If you sell a rental property or investment land, you report the original purchase price, the sale price, and the date of each transaction. The IRS cross-checks these against county property records and title transfers.

If you do not report a capital gain that the IRS already knows about from a broker form, the IRS will send you a notice. You can then owe back taxes, interest, and penalties.

State capital gains taxes vary widely

Federal capital gains tax is only part of what you owe. Most states also tax capital gains, though the rate and rules differ. Some states tax capital gains as ordinary income — meaning a 15% federal long-term gain could also be taxed at 5% to 13% by the state. Other states have a separate, lower capital gains rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax capital gains at all.

If you live in a state with a capital gains tax and sell an investment, you owe both federal and state tax on the same profit. If you move to a different state after selling, the state where you lived when you sold is usually the one that taxes you, not your new state.

Using losses to reduce what you owe

If you sell an investment at a loss, you can use that loss to offset capital gains. If you sold Stock A for a $5,000 gain and Stock B for a $3,000 loss in the same year, your net capital gain is $2,000, and you owe 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 ordinary income. Any loss beyond that carries forward to future years. This is called tax-loss harvesting — deliberately selling losing positions to offset gains and reduce your tax bill.

How to report capital gains on your tax return

You report capital gains on Form 8949 (Sales of Capital Assets) and Schedule D (Capital Gains and Losses). Form 8949 lists each sale: the asset, the date bought, the date sold, the purchase price, the sale price, and the gain or loss. Schedule D summarizes your long-term and short-term gains and losses and calculates your net capital gain or loss for the year.

If you use tax software like TurboTax or TaxAct, you enter the information from your 1099-B forms, and the software fills in the forms for you. If you use a tax professional, bring them the 1099-B forms and any records of sales not reported on a 1099 (such as real estate or inherited assets).

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, you have a capital loss, not a gain, and owe no tax on that sale. You can use the loss to offset other gains or up to $3,000 of ordinary income in the same year.

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

No, not on the inheritance itself. But if you later sell the inherited investment, you owe tax on the gain from the date you inherited it, not from the date the original owner bought it. This is called a "stepped-up basis" and often means little or no tax when you sell soon after inheriting.

Can I avoid capital gains tax by not selling?

Yes. Capital gains tax is owed only when you sell. If you hold an investment and it grows in value but you never sell, you owe no federal tax on the gain while you are alive. When you die, your heirs inherit it at stepped-up basis and can sell without owing tax on your gain.

Do I owe capital gains tax on cryptocurrency?

Yes. The IRS treats cryptocurrency like any other investment. When you sell or trade crypto for a profit, you owe capital gains tax at the same rates as stocks — 0%, 15%, or 20% for long-term, or ordinary income rates for short-term. You report it on Form 8949 and Schedule D.

What if I sold an investment years ago and did not report it?

The IRS can go back three years to assess tax, or longer if the underreporting is substantial. If a broker reported the sale on a 1099-B, the IRS likely has a record. You can file an amended return (Form 1040-X) to report it, which may reduce penalties. Consulting a tax professional is wise in this situation.