How Capital Gains Tax Rates Work and What You Pay

The tax rate on capital gains depends on your income level and how long you held the asset

Capital gains tax is not a single fixed rate. The federal government taxes capital gains at three different rates — 0%, 15%, or 20% — based on your total income for the year and whether you held the investment for more than one year (long-term) or one year or less (short-term). Short-term capital gains are taxed as ordinary income, which means they use the same tax brackets as wages and salaries, ranging from 10% to 37%. Long-term capital gains use their own lower brackets.

Your state may also tax capital gains. Some states treat capital gains like regular income and tax them at your state income tax rate. Other states have separate capital gains taxes or no capital gains tax at all. The total tax you owe combines federal and state rates.

Key Takeaways

• Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% federally, depending on your income bracket for that year.
• Short-term capital gains (assets held one year or less) are taxed as ordinary income at rates from 10% to 37%.
• Your filing status, total income, and state of residence all affect the rate you pay on the same investment.
• The income thresholds that determine which rate applies change each year and vary by filing status.

Long-term capital gains rates and income thresholds

Long-term capital gains receive preferential tax treatment because you held the investment for more than one year. The 0% rate applies to the lowest earners, the 15% rate applies to middle-income filers, and the 20% rate applies to the highest earners. The income thresholds that determine which bracket you fall into change annually and differ based on whether you file as single, married filing jointly, head of household, or married filing separately.

For example, in 2024, a single filer with long-term capital gains enters the 15% bracket at $47,025 in taxable income and enters the 20% bracket at $518,900. A married couple filing jointly enters the 15% bracket at $94,050 and the 20% bracket at $583,750. These numbers shift each year because the IRS adjusts them for inflation. You can find the current year's thresholds on the IRS website or in the instructions to Form 1040.

The 0% bracket does not mean you pay nothing — it means your long-term gains are taxed at zero percent, so you keep all of the profit. This bracket is available only if your total taxable income stays below the threshold for your filing status. Once your income crosses into the 15% bracket, only the gains above that threshold are taxed at 15%; gains below it remain at 0%.

Short-term capital gains and ordinary income tax rates

When you sell an asset you owned for one year or less, the profit is a short-term capital gain. The IRS taxes this as ordinary income, meaning it uses the same tax brackets as your wages, interest, and other regular income. The rates range from 10% to 37% depending on your total income and filing status.

Short-term gains are added to your other income for the year, which can push you into a higher tax bracket. If you earned $60,000 in wages and realized a $20,000 short-term capital gain, your taxable income is $80,000, and you pay tax on that full amount at the ordinary income rates. This is why short-term gains are often taxed at a much higher rate than long-term gains from the same type of investment.

How state capital gains taxes affect your total rate

Thirteen states have a separate capital gains tax, usually applied only to long-term gains or gains above a certain threshold. Washington, for instance, taxes long-term capital gains on the sale of stocks, bonds, and certain other investments at a flat 7% rate. Illinois taxes long-term capital gains at 4.5%. Other states, such as California and New York, treat capital gains as regular income and tax them at their ordinary state income tax rates, which can reach 13% or higher.

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 dividends and interest, not capital gains). If you live in one of these states, you pay only the federal capital gains tax. If you live in a state with an income tax, check your state's tax authority website to understand how it treats capital gains, because the state rate is added to your federal rate.

Net Investment Income Tax and high earners

Taxpayers with high income may also owe the Net Investment Income Tax (NIIT), which is an additional 3.8% federal tax on investment income, including capital gains. This tax applies to single filers with modified adjusted gross income over $200,000 and married couples filing jointly over $250,000. The 3.8% is calculated on the lesser of your net investment income or the amount by which your income exceeds the threshold.

For example, if you are a single filer with $220,000 in income and $30,000 in long-term capital gains, you may owe the 3.8% NIIT on the $20,000 of gains that pushes you over the $200,000 threshold. This tax is separate from the regular capital gains tax rate and is reported on Form 8960. High-income investors should account for this when calculating their total tax liability on investment sales.

How holding period affects your tax rate

The distinction between short-term and long-term is based on the holding period, measured from the date you bought the asset to the date you sold it. If you sell on the same day you buy, or within 365 days, the gain is short-term. If you hold for at least 366 days (more than one year), the gain is long-term. The difference in tax rates can be substantial: a $10,000 gain taxed as short-term at 37% costs $3,700, while the same gain taxed as long-term at 20% costs $2,000.

The holding period is calculated by the IRS using the "holding period" rule: you must hold the asset for more than one year, not exactly one year. If you bought stock on June 15, 2023, you can sell it on June 16, 2024, and may have access to for long-term treatment. If you sell on June 15, 2024, it is still short-term. Wash sale rules and other special situations can affect the holding period, so keep records of your purchase and sale dates.

Capital losses and how they reduce your tax bill

Capital losses can offset capital gains, reducing the amount of gain you owe tax on. If you sold an investment for a $5,000 gain and another for a $3,000 loss in the same year, you report a net gain of $2,000 and pay tax only on that amount. Long-term losses offset long-term gains first, and short-term losses offset short-term gains first. If you have more losses than gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year.

Any losses beyond the $3,000 annual limit carry forward to future years, so you can use them to offset future gains or ordinary income. This is why many investors track their losses throughout the year and consider selling losing positions before year-end to harvest the tax benefit. The IRS requires you to report all sales on Schedule D, whether they resulted in gains or losses.

Frequently Asked Questions

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

No. Capital gains tax is owed only when you sell an investment and realize the gain. If you own stock worth $10,000 more than you paid for it but have not sold it, you owe no tax on that unrealized gain. You pay tax only in the year you sell.

What is the difference between the 15% and 20% long-term capital gains rate?

The rate depends on your total taxable income for the year. The 20% rate applies only to filers whose income exceeds a specific threshold set by the IRS each year. Most investors pay 0% or 15% on long-term gains. The thresholds are high enough that only higher-income filers reach the 20% bracket.

If I live in two states during the year, which state taxes my capital gains?

Generally, the state where you were a resident when you sold the investment taxes the gain. If you moved from one state to another mid-year, you may owe tax to both states on gains realized while you were a resident of each. Consult your state tax authority or a tax professional about your specific situation.

Are capital gains from inherited investments taxed differently?

Inherited investments receive a "step-up in basis," meaning the cost basis is reset to the asset's value on the date of death. If you inherit stock worth $50,000 and sell it for $52,000 a year later, you owe tax only on the $2,000 gain, not on the appreciation that occurred before you inherited it.

Do I owe capital gains tax on cryptocurrency or digital assets?

Yes. The IRS treats cryptocurrency and other digital assets as property, not currency. When you sell or exchange them for a profit, you owe capital gains tax at the same rates as stocks or real estate. The holding period rule applies: gains from assets held over one year are long-term; gains from assets held one year or less are short-term.