How Capital Gains Tax Rates Work and What You Pay

The rate you pay on investment profits depends on how long you held the asset and your total income for the year

Capital gains tax is the federal tax on profit you make when you sell an investment for more than you paid for it. The rate is not one number — it changes based on two things: how long you owned the asset before selling it, and your income bracket that year. The IRS taxes long-term gains (assets held over one year) at lower rates than short-term gains (assets held one year or less). Short-term gains are taxed as ordinary income, which means they use the same tax brackets as your salary or wages.

Long-term capital gains rates are 0%, 15%, or 20%, depending on your income. These rates are lower than ordinary income tax rates, which range from 10% to 37%. The income thresholds that determine which rate applies change each year and vary by filing status — single filers, married filing jointly, and head of household all have different cutoffs.

Key Takeaways

• Long-term capital gains (held over one year) are taxed at 0%, 15%, or 20% based on your income bracket, while short-term gains are taxed as ordinary income at rates up to 37%.
• The income thresholds that determine your capital gains rate change annually and depend on whether you file as single, married filing jointly, or head of household.
• You report long-term gains on Schedule D (Form 1040) and must hold the asset for more than one year to may have access to for the lower rates.
• State and local taxes may also explore to capital gains on top of the federal rate, and some states tax capital gains as ordinary income.

Long-Term vs. Short-Term Capital Gains Rates

The holding period determines which tax rate applies. If you sell an asset you owned for more than one year, it qualifies as a long-term capital gain. If you sell an asset you owned for one year or less, it is a short-term capital gain. The IRS counts the holding period from the date you bought the asset to the date you sold it.

Short-term gains are taxed at your ordinary income tax rate — the same rate that applies to your salary, wages, or self-employment income. For 2024, those rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Long-term gains use a separate, lower rate structure: 0%, 15%, or 20%. This difference can be substantial. A person in the 24% ordinary income bracket might pay only 15% on a long-term gain from the same year.

Example: You buy stock for $5,000 and sell it eight months later for $7,000. The $2,000 profit is a short-term gain and is taxed at your ordinary income rate. If you held that same stock for 14 months before selling it for $7,000, the $2,000 profit is a long-term gain and is taxed at the 0%, 15%, or 20% rate depending on your income.

How Income Brackets Determine Your Long-Term Rate

Your long-term capital gains rate depends on which income bracket you fall into that year. The IRS publishes three separate rate brackets for long-term gains: the 0% bracket, the 15% bracket, and the 20% bracket. Your filing status — single, married filing jointly, married filing separately, or head of household — determines the income thresholds for each bracket.

For 2024, the 0% long-term capital gains bracket applies to single filers with taxable income up to $47,025 and married filing jointly filers with taxable income up to $94,050. The 15% bracket applies to income above those thresholds up to $518,900 (single) or $583,750 (married filing jointly). Income above those amounts is taxed at 20%. These thresholds increase slightly each year for inflation.

Your taxable income includes wages, self-employment income, interest, dividends, and capital gains combined. If you have a large salary and also sell an investment at a gain, the gain may push you into a higher capital gains bracket. The order in which you report income can matter: long-term gains are stacked on top of your other income, so gains reported later in the calculation may be taxed at a higher rate.

State and Local Taxes on Capital Gains

Federal capital gains tax is only part of what you owe. Most states also tax capital gains, and the rate varies widely. Some states tax capital gains as ordinary income using their regular income tax brackets. Others have a separate capital gains tax rate. A few states do not tax capital gains at all.

California, for example, taxes long-term capital gains as ordinary income at rates up to 13.3%. New York taxes them at ordinary income rates up to 10.9%. Washington State has a capital gains tax of 7% on long-term gains over $250,000. New Hampshire and Tennessee tax only interest and dividends, not capital gains. Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax at all.

Your total tax bill on an investment sale includes the federal rate plus your state rate. A person in California selling a long-term gain while in the top federal bracket could owe 20% federal plus 13.3% state, totaling 33.3%. The same transaction in Florida would be 20% federal only. Check your state's tax department website to find the current rate in your state.

How to Report Capital Gains on Your Tax Return

You report capital gains on Schedule D (Form 1040), which is the Capital Gains and Losses form. Schedule D has separate sections for short-term gains and long-term gains. You list each sale separately: the date you bought it, the date you sold it, the sale price, the cost basis (what you paid), and the gain or loss.

If you have only one or two straightforward sales, you may be able to report them directly on Form 1040 without filing a full Schedule D, depending on the year and your situation. However, most people with multiple investments or significant gains file the full Schedule D. The form calculates your net gain or loss by adding up all short-term transactions and all long-term transactions separately.

Your tax software or tax preparer will ask you for the purchase date, sale date, and sale price for each investment you sold during the year. Many brokers and investment platforms provide a year-end statement that lists these details. Keep records of your original purchase confirmation and sale confirmation for at least three years in case the IRS asks questions.

Common Situations That Affect Your Capital Gains Rate

Certain transactions and life events can change how much capital gains tax you owe. If you inherit an investment, the cost basis resets to the market value on the date of death, so you owe no tax on gains that occurred before you inherited it — only on gains after you own it. If you receive stock as compensation from an employer, your cost basis is the fair market value on the date you received it, not the current price.

If you sell an investment at a loss, you can use that loss to offset gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 of the net loss against ordinary income in that year. Any remaining loss carries forward to future years. This strategy, called tax-loss harvesting, can reduce your overall tax bill.

If you are retired and your income is low, you may fall into the 0% long-term capital gains bracket, meaning you owe no federal tax on long-term gains up to the threshold. This can be a significant advantage in years when you have low income and want to sell appreciated assets.

Frequently Asked Questions

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

No, you do not owe tax on a loss. Instead, you can use the loss to reduce taxes on gains from other investments or on up to $3,000 of ordinary income in that year. Any unused loss carries forward to future years.

What if I sell an investment less than one year after buying it?

It is taxed as a short-term capital gain at your ordinary income tax rate, which is higher than the long-term rate. If you are in the 24% tax bracket, a short-term gain is taxed at 24%, while a long-term gain would be taxed at 15% or less.

Do I have to pay capital gains tax on mutual funds or index funds?

Yes, when you sell shares of a mutual fund or index fund for more than you paid, you owe capital gains tax on the profit. You also may owe tax on distributions the fund pays out, even if you reinvest them. Your fund company sends a statement each year showing what you owe.

Can I reduce my capital gains tax by spreading the sale over two years?

Not by selling in two separate years — each sale is taxed in the year it occurs. However, if you have losses in one year and gains in another, the timing of when you realize each can affect your total tax. Talk to a tax professional about your specific situation.

Are capital gains from selling a home taxed the same way?

No. If you sell a primary residence you owned and lived in for at least two of the last five years, you can exclude up to $250,000 of gain (or $500,000 if married filing jointly) from tax. This exclusion is separate from the capital gains rate structure.