Capital gains tax is not one fixed percentage — the rate depends on how long you held the asset, your income level, and whether you live in a state with its own capital gains tax
When you sell an investment for more than you paid for it, the profit is a capital gain. The federal tax rate on that gain is either 0%, 15%, or 20%, determined by your income bracket and how long you owned the asset. Some states also tax capital gains separately. The difference between short-term and long-term gains — based on whether you held the asset for more than one year — creates the biggest split in what you actually owe.
The rate you pay is not the same as your regular income tax bracket. A person in the 24% income tax bracket might pay 15% on long-term capital gains, or 24% on short-term gains. Understanding which category your sale falls into is the first step to knowing what you owe.
Key Takeaways
- Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your taxable income, while short-term gains are taxed as ordinary income at your regular tax bracket rate.
- The income thresholds for each long-term rate change yearly and differ based on filing status — single filers, married filing jointly, and heads of household have different brackets.
- Short-term gains are treated like wages or salary income, so they use your regular income tax brackets (10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2024).
- Some states impose their own capital gains tax on top of the federal rate, ranging from 3% to over 13% depending on the state.
- The holding period clock starts the day after you buy an asset and ends the day you sell it; selling one day too early can move you from long-term to short-term treatment.
Long-Term Capital Gains Rates and Income Thresholds
If you held an asset for more than one year before selling it, the gain qualifies for long-term capital gains treatment. The federal rate is 0%, 15%, or 20%, based on your taxable income and filing status. For 2024, the 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 adjust each year for inflation. The IRS publishes updated amounts in late 2023 for the following tax year, so the 2025 thresholds will be higher than 2024. You can find the current year's thresholds on the IRS website or in the instructions to Form 1040.
Your taxable income — not your gross income — determines which bracket you fall into. Taxable income is what remains after you subtract the standard deduction (or itemized deductions) from your adjusted gross income. A person earning $100,000 in wages might have a taxable income of $75,000 after the standard deduction, which affects which capital gains rate applies.
Short-Term Capital Gains and Ordinary Income Tax Rates
If you held an asset for one year or less before selling it, the gain is short-term capital gains. These are taxed as ordinary income at your regular income tax bracket rate. In 2024, those rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on your taxable income and filing status.
Short-term gains stack on top of your other income. If you earned $60,000 in wages and have $10,000 in short-term capital gains, your taxable income for that year is $70,000 (before deductions). That combined amount determines which tax bracket applies to the gains. This is why short-term gains often result in a higher tax bill than long-term gains for the same dollar amount.
The holding period is strict: you must own the asset for more than one year. Selling on day 366 qualifies as long-term; selling on day 365 does not. The clock starts the day after you purchase the asset and ends on the day you sell it.
State Capital Gains Taxes
In addition to federal tax, some states impose their own capital gains tax. As of 2024, the states with dedicated capital gains taxes are California, Connecticut, Delaware, Illinois, Maryland, Minnesota, Missouri, Montana, New Jersey, New York, Oregon, Vermont, and Washington. Several other states are considering or have recently passed such taxes.
State rates vary widely. Washington's capital gains tax is 7% on long-term gains over $250,000. California taxes capital gains as ordinary income, so rates range from 1% to 13.3% depending on your state income bracket. New Jersey's rate is 3.876% on long-term gains. Check your state's department of revenue website to find the exact rate and any thresholds that explore in your state.
If you live in a state with a capital gains tax and sell an asset, you owe both the federal rate and the state rate. A person in the 15% federal long-term bracket who lives in Washington and sells an asset with a $100,000 gain would owe $15,000 federal plus $7,000 state (if the gain exceeds the threshold), for a combined 22% rate.
How the Net Investment Income Tax Affects High Earners
Individuals with modified adjusted gross income above certain thresholds pay an additional 3.8% tax on investment income, including capital gains. This is the Net Investment Income Tax, created under the Affordable Care Act. For 2024, the threshold is $200,000 for single filers and $250,000 for married filing jointly.
If your modified adjusted gross income exceeds the threshold, you pay 3.8% on the lesser of your net investment income or the amount by which your income exceeds the threshold. This tax applies to long-term gains, short-term gains, dividends, interest, and other investment income. It is separate from and in addition to the capital gains tax rates described above.
For example, a single filer with $300,000 in modified adjusted gross income who has $50,000 in long-term capital gains would owe the 3.8% tax on $50,000 (since the gain is less than the $100,000 excess over the threshold). That is $1,900 in Net Investment Income Tax, plus the regular capital gains tax rate on the $50,000 gain.
Capital Losses and How They Reduce Your Tax Bill
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. If your losses exceed your gains, you can deduct up to $3,000 of the excess loss against ordinary income (wages, salary, interest, etc.). Any remaining loss carries forward to future years.
Losses are sorted by holding period: long-term losses offset long-term gains first, and short-term losses offset short-term gains first. If you have both types of gains and losses, the IRS has rules about which offset which. This matters because it determines whether the remaining gain is taxed at the long-term or short-term rate.
You report capital gains and losses on Schedule D (Form 1040). If you have a net loss for the year, you still file Schedule D to document it, even if you cannot deduct the full amount in that tax year.
Frequently Asked Questions
Do I pay capital gains tax on inherited assets?
No, not when ready. Inherited assets receive a "step-up in basis," meaning the cost basis resets to the asset's value on the date of death. If you inherit stock worth $100,000 and sell it a month later for $102,000, you owe tax only on the $2,000 gain, not the entire $102,000. This applies regardless of how long the deceased person held the asset.
What if I sell my primary home — do I pay capital gains tax?
You may not owe tax on the gain. The IRS allows you to exclude up to $250,000 of gain (or $500,000 if married filing jointly) if you owned and lived in the home as your primary residence for at least two of the last five years before the sale. Gains above that threshold are taxed as long-term capital gains.
How do I report capital gains on my tax return?
You report them on Schedule D (Form 1040), which asks for the date acquired, date sold, cost basis, and sale price for each asset. Your broker sends you a Form 1099-B showing transactions, which you use to fill out Schedule D. The completed Schedule D then flows to your Form 1040 to calculate your total tax.
Can I reduce my capital gains tax by timing when I sell?
Yes, in some cases. Selling an asset just after it has been held for one year moves it from short-term to long-term treatment, potentially lowering your rate significantly. You can also harvest losses in one year to offset gains in another year, though the IRS has rules against "wash sales" that prevent you from when ready repurchasing the same asset to claim a loss.
What is the difference between capital gains and dividends?
Capital gains are profits from selling an asset for more than you paid. Dividends are payments made by a company to shareholders. may have access to dividends (from U.S. companies and held for specific periods) are taxed at the same long-term capital gains rates. Nonqualified dividends are taxed as ordinary income at your regular bracket rate.