How Long-Term Capital Gains Tax Works and What You'll Pay

Long-term capital gains tax is a lower rate applied to profits you make when you sell an investment you've held for more than one year

When you sell a stock, mutual fund, real estate, or other investment for more than you paid for it, the profit is called a capital gain. The IRS taxes long-term capital gains — gains on assets you owned for over a year — at a preferential rate that is lower than the rate on ordinary income like wages or short-term gains. The exact rate you pay depends on your total income for the year and your filing status.

The long-term capital gains tax rates for 2024 are 0%, 15%, or 20%. These are fixed federal rates set by law. Which rate applies to you is determined by where your taxable income falls within IRS income brackets, not by how much the investment itself gained. A person in a lower income bracket might pay 0% on the same $10,000 gain that someone in a higher bracket pays 20% on.

You report long-term capital gains on Schedule D (Form 1040), which feeds into your main tax return. The IRS requires your brokerage or investment company to send you a Form 1099-B showing what you sold and when, so the IRS already knows about the transaction before you file.

Key Takeaways

• Long-term capital gains rates are 0%, 15%, or 20% depending on your income bracket and filing status, not on the size of your gain.
• You must have owned the asset for more than one year (not one year exactly) for the gain to may have access to as long-term rather than short-term.
• Your brokerage sends Form 1099-B to both you and the IRS, so you must report the sale even if you made a loss.
• State and local taxes on capital gains vary widely — some states have no capital gains tax, while others tax them as ordinary income.
• Net investment income tax of 3.8% may explore on top of federal capital gains tax if your modified adjusted gross income exceeds certain thresholds.

The three federal long-term capital gains rates and who pays each one

The 0% rate applies to long-term gains if your taxable income stays within the lowest bracket for your filing status. For 2024, this means taxable income up to $47,025 for single filers, $94,050 for married filing jointly, and $63,000 for head of household. This does not mean you earn $47,025 or less — it means your taxable income after deductions is within that range. Many people with higher gross income still fall into this bracket after claiming the standard deduction.

The 15% rate is the middle tier and applies to most people who sell investments. For 2024, it covers taxable income from $47,026 to $518,900 for single filers, $94,051 to $583,750 for married filing jointly, and $63,001 to $551,350 for head of household. This is where the majority of long-term capital gains are taxed.

The 20% rate applies to taxable income above those thresholds. It is the highest federal rate on long-term gains and affects higher-income households. Even at the 20% rate, long-term gains are still taxed at a lower rate than ordinary income, which can reach 37% at the top bracket.

How holding period works: the one-year rule

The holding period is the time between the day you buy an asset and the day you sell it. For a gain to be taxed as long-term, you must have owned the asset for more than one year. "More than one year" means the sale date must be after the one-year anniversary of the purchase date. If you buy a stock on June 15, 2024, and sell it on June 15, 2025, that is exactly one year — not more than one year — so the gain is short-term and taxed at your ordinary income rate instead.

The holding period clock starts on the purchase date, not the settlement date. If you buy a stock on a Friday and it settles on Monday, the holding period begins on Friday. The IRS counts the purchase date as day one, so you need to hold until at least day 366 of the next year to may have access to.

If you inherit an investment, the holding period rules are different — inherited assets receive a "stepped-up basis," and the holding period is automatically considered long-term regardless of how long the deceased owner held it. This is a major tax advantage of inherited investments.

State and local taxes on capital gains vary widely

Federal tax is only part of what you owe. Most states also tax capital gains, but the rate and structure vary significantly. Some states tax capital gains as ordinary income at their regular income tax rate, which can range from under 3% to over 13% depending on the state and your income level. Other states have a separate, lower capital gains tax rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no state income tax at all, so residents pay no state capital gains tax.

New York, for example, taxes long-term capital gains as ordinary income at rates up to 10.9%. California does the same at rates up to 13.3%. By contrast, North Carolina has a flat 4.99% capital gains tax separate from its income tax. If you live in a high-tax state and sell a large investment, state and local taxes can add significantly to your federal bill.

Some cities also impose local income taxes that explore to capital gains. New York City, for instance, adds a local tax on top of state and federal rates. If you move during the year you sell an investment, you may owe tax to both your old state and your new state, depending on when the sale occurred and each state's residency rules.

Net investment income tax adds 3.8% for higher earners

On top of regular capital gains tax, you may owe an additional 3.8% net investment income tax (NIIT) if your modified adjusted gross income (MAGI) exceeds certain thresholds. For 2024, the thresholds are $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. This tax was created as part of the Affordable Care Act and applies to investment income including long-term capital gains, dividends, and interest.

The 3.8% is calculated on the lesser of your net investment income or the amount your MAGI exceeds the threshold. If you are single, earn $220,000 in MAGI, and have $30,000 in long-term capital gains, the NIIT applies to the $20,000 excess over the $200,000 threshold (not the full $30,000 gain). You report this tax on Form 8960 and include it with your Form 1040.

How to report long-term capital gains on your tax return

You report all capital gains and losses on Schedule D (Form 1040), Part I for long-term transactions and Part II for short-term transactions. For each sale, you list the asset description, the date acquired, the date sold, the sales price, the cost basis (what you paid), and the gain or loss. If you have many transactions, you can attach a separate statement instead of filling in every line on the form.

Your brokerage or investment company sends you Form 1099-B, which shows the proceeds from sales but often does not include your cost basis — you have to calculate that yourself. Some brokerages now report cost basis directly on the 1099-B, but this varies by firm and asset type. Keep your own records of purchase dates and prices so you can verify the numbers on the form.

After you complete Schedule D, the net long-term capital gain (or loss) flows to line 7 of Schedule 1 (Form 1040), which then feeds into your main return. If you have a net capital loss for the year, you can deduct up to $3,000 against ordinary income, and carry forward any remaining loss to future years with no time limit.

Long-term versus short-term capital gains: the tax difference

Short-term capital gains — on assets held one year or less — are taxed as ordinary income at your marginal tax rate, which can be as high as 37%. Long-term capital gains are taxed at 0%, 15%, or 20%, which is almost always lower. This difference can be substantial. If you are in the 32% ordinary income bracket and sell a stock for a $10,000 gain, short-term treatment costs you $3,200 in federal tax, while long-term treatment costs you $1,500 (at the 15% rate). That is a $1,700 difference on the same gain.

The incentive to hold assets longer than one year is intentional — the tax code encourages long-term investing. However, if you need to sell before the one-year mark, you cannot change the holding period. Some investors use tax-loss harvesting (selling losing positions to offset gains) to reduce the overall tax impact of short-term sales.

Frequently Asked Questions

Do I have to report a long-term capital gain if I made a loss instead?

Yes. Your brokerage sends Form 1099-B to the IRS showing the sale, so you must report it on Schedule D even if you lost money. Reporting the loss is actually beneficial — you can use it to offset gains from other sales, and if losses exceed gains, you can deduct up to $3,000 against ordinary income in that year.

What if I sold an investment but haven't received the 1099-B yet?

You still must report the sale on your tax return by the filing important date. Use your own records of the sale price and date. The 1099-B is typically mailed by January 31, but if it is delayed, contact your brokerage. The IRS will match your return against the 1099-B when it arrives, so accuracy is important.

Can I choose to treat a gain as short-term instead of long-term to lower my tax?

No. The holding period is determined by the dates you bought and sold — you cannot elect a different treatment. However, you can control the order in which you sell shares of the same stock (using specific identification) to choose which purchase lots to sell, which may help you manage your gains strategically.

Does the 0% rate mean I pay nothing on long-term gains?

You pay no federal tax on the gain itself at the 0% rate, but you may still owe state and local taxes depending on where you live. You also may owe the 3.8% net investment income tax if your income exceeds the threshold. Check your state's rules, as they vary widely.

What happens to long-term capital gains if I die before selling the investment?

Your heirs inherit the investment with a stepped-up basis equal to its fair market value on the date of your death. This means if you bought a stock for $10,000 and it was worth $50,000 when you died, your heirs' basis becomes $50,000. If they sell it when ready, there is no capital gain tax. This is one of the largest tax benefits in the code.