How Capital Gains Tax Rates Work and What They Mean for Your Investments

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

Capital gains tax is the tax you pay on profit when you sell an investment for more than you paid for it. The rate you pay — ranging from 0% to 20% on federal tax — depends on two things: whether you held the asset for more than one year (long-term) or one year or less (short-term), and your total taxable income for the year.

Long-term capital gains rates are lower than short-term rates. Short-term gains are taxed as ordinary income, which means they use the same tax brackets as wages and salary — up to 37% federally. Long-term gains use their own brackets: 0%, 15%, or 20%, depending on your income. Most people pay 15% on long-term gains.

Your state may also tax capital gains. Some states have no capital gains tax at all. Others tax capital gains as income. A few states have a separate capital gains tax. The rate varies by state and changes year to year.

Key Takeaways

• Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% federally; short-term gains use your ordinary income tax rate, which can be as high as 37%.
• Your income level determines which long-term rate applies to you, not the amount of the gain itself.
• State capital gains taxes vary widely — some states do not tax capital gains at all, while others tax them as regular income or explore a separate rate.
• The date you bought and sold the asset determines whether a gain is long-term or short-term, and this distinction can cut your federal tax in half or more.

Long-term capital gains rates and income thresholds

The 0%, 15%, and 20% long-term rates explore based on your taxable income, not the size of your gain. For 2024, the income thresholds are:

Filing Status	0% Rate	15% Rate	20% Rate
Single	Up to $47,025	$47,025 to $518,900	Over $518,900
Married Filing Jointly	Up to $94,050	$94,050 to $583,750	Over $583,750
Head of Household	Up to $62,975	$62,975 to $551,350	Over $551,350

These thresholds change each year. The IRS publishes updated amounts in the spring. If your taxable income falls in the 0% bracket, you pay no federal tax on long-term gains. If it falls in the 15% bracket, you pay 15% on those gains. If it exceeds the 20% threshold, gains above that threshold are taxed at 20%.

Your taxable income includes wages, interest, dividends, and other income, minus deductions. A capital gain can push you into a higher bracket. For example, if you are single with $40,000 in wages and you sell stock for a $20,000 gain, your taxable income is $60,000, which puts part of your gain in the 15% bracket.

Short-term capital gains and ordinary income tax rates

Short-term capital gains — from assets you held for one year or less — are taxed as ordinary income. This means they use the same tax brackets as your salary or wages. Federal rates range from 10% to 37%, depending on your total income and filing status.

Because short-term gains can be taxed at much higher rates than long-term gains, the holding period matters significantly. An investor who sells a stock after 11 months might pay 24% or 32% on the gain, while the same gain held for 13 months would be taxed at 15% or 20%.

Short-term gains are added to your other income before calculating your tax bracket. If you have $80,000 in wages and a $10,000 short-term gain, you are taxed on $90,000 of income, which may push you into a higher bracket than wages alone.

How holding period is calculated

The holding period starts the day after you buy an asset and ends the day you sell it. If you buy stock on January 15 and sell it on January 15 of the next year, you have held it for exactly one year, and the gain is long-term. If you sell on January 14, it is short-term.

The holding period applies to each asset separately. You might have long-term gains on one stock and short-term gains on another, even if you sell them on the same day. Each is taxed according to how long you held that specific asset.

Wash sales do not reset the holding period. If you sell a stock at a loss and buy the same or substantially identical stock within 30 days, the loss is disallowed, but the holding period of the new purchase starts fresh from the new purchase date.

State capital gains taxes

Capital gains tax at the state level varies widely. As of 2024, nine states have no income tax and therefore no capital gains tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, not capital gains).

Most states that have income tax treat capital gains as ordinary income and tax them at the same rate as wages. A few states have separate capital gains tax rates. California taxes long-term gains as income. Washington has a 7% capital gains tax on long-term gains over $250,000. Illinois has a 20% tax on long-term gains. Rates and thresholds change, so check your state's department of revenue for current rules.

If you live in a state with capital gains tax, you owe that tax on gains from assets you sold while a resident of that state. If you move to a state with no capital gains tax, gains from assets sold after you move are not subject to your former state's tax.

Net investment income tax

In addition to capital gains tax, you may owe the Net Investment Income Tax (NIIT) if your modified adjusted gross income exceeds certain thresholds. This is a 3.8% federal tax on investment income, including capital gains.

For 2024, NIIT applies if your modified adjusted gross income is over $200,000 (single) or $250,000 (married filing jointly). The tax applies only to the lesser of your net investment income or the amount your income exceeds the threshold. If you are single with $220,000 in income and $30,000 in capital gains, the NIIT applies to $20,000 of the gain (the amount your income exceeds $200,000).

NIIT is separate from capital gains tax. You may owe both. For example, a long-term gain taxed at 15% could also be subject to the 3.8% NIIT, bringing your total federal tax on that gain to 18.8%.

Capital losses and how they offset gains

Capital losses reduce your capital gains tax. If you sell an asset for less than you paid for it, you have a capital loss. You can use capital losses to offset capital gains in the same year. Long-term losses offset long-term gains first, and short-term losses offset short-term gains first. If losses exceed gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year.

Unused losses carry forward to future years with no time limit. If you have a $10,000 loss and only $4,000 in gains this year, you can deduct $3,000 against ordinary income and carry the remaining $3,000 forward to next year.

The order in which you sell assets matters for tax purposes. If you own multiple shares of the same stock bought at different prices, you can choose which shares to sell — a strategy called specific identification. This lets you control whether a sale triggers a gain or loss and whether it is long-term or short-term.

Frequently Asked Questions

Do I pay capital gains tax on stocks I still own?

No. Capital gains tax applies only when you sell an asset. Unrealized gains — profit on stocks you still own — are not taxed. You pay tax only when you sell and lock in the gain.

What if I inherited stock — do I owe capital gains tax when I sell it?

Inherited assets receive a "step-up in basis," meaning your cost basis becomes the asset's value on the date of death, not what the original owner paid. If you inherit stock worth $50,000 and sell it for $52,000 a month later, your gain is $2,000, not the full amount the original owner gained. This step-up applies to most inherited assets.

Are dividends taxed the same way as capital gains?

may have access to dividends are taxed at the same long-term capital gains rates (0%, 15%, or 20%). Non-may have access to dividends are taxed as ordinary income. Most dividends from U.S. stocks are may have access to if you held the stock for more than 60 days around the dividend date.

Can I deduct investment losses on my taxes?

Yes, but with limits. You can deduct capital losses against capital gains with no limit. If losses exceed gains, you can deduct up to $3,000 of the excess against ordinary income. Amounts over $3,000 carry forward to future years.

Do I owe capital gains tax on real estate I sell?

Yes, unless you meet the exclusion for a primary residence. If you are single and sell a home you owned and lived in for at least two of the last five years, you can exclude up to $250,000 of gain from tax. Married couples filing jointly can exclude up to $500,000. Gains above the exclusion are taxed as capital gains.