What the Capital Gains Tax Rate Actually Is

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

The federal capital gains tax is not a single percentage. The IRS taxes gains on assets you sell at one of three rates — 0%, 15%, or 20% — based on your total income for the year and whether you held the asset for more than one year. Most people pay 15%. Some pay nothing. A smaller group pays 20%. Your state may also tax capital gains, and that rate varies by state.

The rate you pay is determined at tax time, not when you sell. You do not know your rate until you add up all your income for the year, because the brackets shift based on your filing status and total earnings.

Key Takeaways

• Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your total income for the year, not on the gain itself.
• Short-term capital gains (assets held one year or less) are taxed as ordinary income at your regular tax bracket rate, which can be as high as 37%.
• The 0% rate applies to lower-income filers, the 15% rate to most middle-income filers, and the 20% rate to high-income filers.
• State capital gains taxes range from zero in some states to over 13% in others, and are added on top of the federal rate.
• Your rate is determined when you file taxes, not when you sell the asset, because it depends on your total income that year.

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

If you held an asset for more than one year before selling it, the gain is taxed as a long-term capital gain. The federal rate depends on your income bracket for that tax year.

The 0% bracket applies to single filers with taxable income up to a certain threshold and married couples filing jointly up to a higher threshold. These thresholds change each year. If your total taxable income falls below the threshold for your filing status, you owe no federal tax on long-term gains.

The 15% bracket covers most taxpayers. It applies to income above the 0% threshold but below the 20% threshold. Again, these thresholds shift annually and depend on whether you file as single, married filing jointly, head of household, or another status.

The 20% bracket is the highest rate and applies to high-income filers whose taxable income exceeds the top threshold for their filing status.

Short-term capital gains are taxed like regular income

If you held an asset for one year or less before selling it, the gain is taxed as a short-term capital gain. This is taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status.

Short-term gains are added to your other income for the year and taxed in the same brackets as wages or salary. This is why someone who sells a stock they bought six months ago might pay 24% or 32% on the gain, while someone who held the same stock for two years might pay 15%.

The difference between holding an asset just over one year versus just under one year can mean a significant tax difference. Many investors time sales to cross the one-year mark for this reason.

State capital gains taxes add to the federal rate

Most states do not have a separate capital gains tax. They tax capital gains as part of ordinary income using their regular income tax brackets. A few states have a dedicated capital gains tax on top of income tax.

Washington State, for example, taxes long-term capital gains on the sale of certain assets at 7%. California taxes capital gains as ordinary income, with rates up to 13.3%. New York's top rate is 10.9%. Other states have no capital gains tax at all.

Your total tax bill is the federal rate plus your state rate. A person in the 15% federal bracket living in Washington State would pay 22% total on a long-term gain. The same person in a state with no capital gains tax would pay only 15%.

How your income level determines your rate

The rate you pay is not based on the size of the gain. It is based on your total taxable income for the year. If you earn $50,000 in wages and have a $100,000 capital gain, your rate is determined by adding those together to get $150,000 in total income.

This means the same $10,000 gain could be taxed at 0%, 15%, or 20% depending on what else you earned that year. A retiree with little other income might pay 0%. A person with a six-figure salary might pay 20%. Someone in the middle pays 15%.

Tax software and tax professionals calculate this by stacking your income: first your ordinary income, then your capital gains on top. The rate applied to the gains depends on which bracket they fall into.

The difference between realized and unrealized gains

You only owe capital gains tax when you sell an asset and realize the gain. If you own a stock that has doubled in value but you have not sold it, you owe no tax on that gain yet. It is an unrealized gain.

This is why investors can hold assets for decades without paying tax. The tax is triggered by the sale, not by the increase in value. Once you sell, the IRS wants to know the purchase price, the sale price, and how long you held it.

Some people use this to manage their taxes strategically. They might sell losing investments to offset gains, or they might delay selling until a year when their income is lower and their rate would be 0% or 15% instead of 20%.

How to report capital gains on your tax return

When you sell an asset, your broker sends you a Form 1099-B showing the sale price and purchase price. You report this on Schedule D of your tax return, which separates long-term and short-term gains.

You list each sale with the purchase date, sale date, purchase price, and sale price. The software or your tax preparer calculates the gain and applies the correct rate based on your holding period and total income.

If you have losses, you can use them to offset gains. If losses exceed gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year, and carry forward any remaining loss to future years.

Frequently Asked Questions

Do I pay capital gains tax if I sell at a loss?

No, you do not owe capital gains tax on a loss. Instead, you can use the loss to reduce any capital gains you had that year. If losses exceed gains, you can deduct up to $3,000 against ordinary income and carry the rest forward to future years.

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

No. Inherited assets receive a "step-up in basis," meaning the tax basis resets to the value on the date of death. If you inherit a stock worth $100,000 and sell it the next day for $100,000, you owe no capital gains tax, even if the original owner bought it for $20,000.

Can I avoid capital gains tax by holding an asset forever?

Yes, as long as you do not sell. Capital gains tax is only triggered by a sale. However, your heirs will receive a step-up in basis, so they can sell without owing tax on the gain that occurred during your lifetime.

Is the 0% capital gains rate really zero?

Yes. If your total taxable income falls within the 0% bracket for your filing status, you owe no federal capital gains tax on long-term gains. You still have to report the gain on your tax return, but the tax owed is zero. State taxes may still explore.

What if I day-trade stocks — is that taxed differently?

Yes. Frequent trading is taxed as short-term gains at your ordinary income rate, which is higher than long-term rates. The IRS does not have a specific rule for how many trades make you a "day trader," but the intent is clear: short-term gains pay ordinary income tax rates.