- The capital gains tax rate applies to profits on your investments.
- If you owned an asset for a year or more before selling, it's taxed at a reduced rate.
- You can minimize the tax by investing in tax-advantaged accounts, donating appreciated stock, and using capital losses.
Capital gains are profits. Specifically, the profits you make from selling capital assets, such as stocks, bonds, real estate, and collectibles.
Like other income, capital gains are taxed. Let's examine which capital gains tax rate applies to which investments.
What is the capital gains tax?
The capital gains tax is a tax on the net profit from the sale of an asset, such as a mutual fund or a home. You'll owe capital gains tax for an asset in the same tax year in which you sell that asset. So if you sold stock in 2024, you would owe capital gains tax with your 2024 tax return.
The U.S. government taxes capital gains based on how long you hold an asset and your overall income, though some gains are excluded for certain assets.
Importantly, under current law, capital gains aren't taxable until an asset is sold. Selling an asset results in realized capital gains — as opposed to unrealized gains, which would refer to assets or investments that haven't been sold yet.
Generally, the lower your income and the longer you hold an asset, the lower your capital gain tax. In some cases, it could be as low as 0%. However, many high earners pay low capital gains tax thanks to sophisticated strategies such as tax-loss harvesting.
Understanding capital gains
The tax rate you'll pay on capital gains can be lower than the rate you'll pay on other types of income, such as salary or profit from a business. But the amount you'll pay depends on how long you hold onto the asset before selling it.
There are two capital gains tax rates, reflecting the two types of capital gains: short-term and long-term.
- You have a short-term capital gain if you hold an asset for one year (365 days) or less.
- You have a long-term capital gain if you hold an asset for longer than one year.
The clock begins ticking on the day after you buy the asset, up to and including the day you sell it.
Tax Time
The best tax software can help save you time and money when it comes time to file your taxes. TurboTax and TaxAct are popular options.
Capital gains tax rates for tax year 2024
Short-term capital gains
Short-term capital gains are taxed at ordinary income tax rates, up to 37%. The rate you'll pay depends on your filing status and total taxable income for the year.
Short-term capital gains rates:
| Rate | Single | Married filing jointly and qualifying surviving spouses | Married filing separately | Head of household |
| 10% | $0 to $11,600 | $0 to $23,200 | $0 to $11,600 | $0 to $16,550 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $11,601 to $47,150 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $47,151 to $100,525 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,725 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 | $243,701 to $609,350 |
| 37% | $609,351 and over | $731,201 and over | $365,601 and over | $609,351 and over |
Long-term capital gains
If you manage to hold onto your investment for more than one year (365 days), you can benefit from a reduced tax rate on your capital gains. Long-term capital gains are taxed at preferential rates, up to 20%. The rate you'll pay depends on your filing status and total taxable income for the year.
Long-term capital gains rates:
| Tax rate | Taxable income for single | Taxable income for married filing jointly and qualifying surviving spouses | Taxable income for married filing separately | Taxable income for head of household |
| 0% | Up to $44,625 | Up to $89,250 | Up to $44,625 | Up to $59,750 |
| 15% | $44,626 to $492,300 | $89,251 to $553,850 | $44,626 to $276,900 | $59,751 to $523,050 |
| 20% | $492,301 and over | $553,851 and over | $276,901 and over | $523,051 and over |
The net investment income tax on capital gains
Capital gains taxes aren't the only ones investors have to worry about, though.
The net investment income tax (NIIT) is a separate tax, but it can have an impact on the tax you pay on capital gains as well as other types of investment income.
The NIIT imposes a 3.8% tax on the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds a certain amount.
Investment income includes:
- Distributions from annuities
- Interest
- Dividends
- Capital gains
- Income from passive activities
- Rents
- Royalties
The total of your investment income is reduced by any deductions related to investments, such as investment interest expense and expenses related to rental property or royalties, to arrive at net investment income.
The NIIT only applies if your MAGI exceeds the threshold amount for your filing status. Those thresholds are:
- $200,000 for single filers and head of household
- $250,000 for married couples filing jointly
- $125,000 for married couples filing separately
If your income exceeds the threshold, you calculate NIIT on Form 8960 and file it along with your Form 1040 tax return.
How to calculate capital gains
Determine your cost basis
When you sell a capital asset at a price higher than its "basis," you're generally required to report a capital gain on your federal income tax return.
Basis means the asset's purchase price, plus any money you reinvested or put into improving it.
Calculate your proceeds
Your proceeds are generally the sale price minus any fees or commissions.
Subtract cost basis from proceeds
You'll subtract your basis from the sale price to get your gain (or loss) for each investment. Then you will need to net short-term gains against short-term losses and long-term gains against long-term losses.
If you're left with a long-term loss and a short-term gain, or vice versa, you can net them against each other. Remember, only net profits (gains minus losses) are taxable.
To illustrate, say you are a single taxpayer in 2024 with wages of $85,000, a net short-term capital gain of $10,000, and you claim the standard deduction ($14,600). Your taxable income is $80,400 ($85,000 + $10,000 - $14,600), putting you in the 22% tax bracket for 2024.
However, you don't pay 22% on all your income, only income over $47,150 (the top of the 12% tax bracket). You calculate your tax as follows:
- 10% of the first $11,000 of income: $1,100
- 12% of the next $36,150 of income: $4,338
- 22% of the last $33,250 of income: $7,315
For your 2024 tax return (filed in 2025), your tax bill is roughly $12,753.
Now, if the $10,000 gain was long-term, the tax calculation looks a little different.
Your total taxable income is still $80,400, but your ordinary income is $70,400 ($85,000 of wages - $14,600 standard deduction). You leave out the capital gain.
You are still in the 22% tax bracket, and calculate your ordinary income tax as follows:
- 10% of the first $11,000 of income: $1,100
- 12% of the next $36,150 of income: $4,338
- 22% of the last $23,250: $5,115
For long-term capital gains, you fall into the 15% tax bracket, so you calculate your long-term capital gains tax separately as 15% of $10,000: $1,500.
For 2024, your tax bill is roughly $12,053.
Having your capital gain taxed at long-term rather than short-term rates results in $700 of tax savings.
Strategies to minimize capital gains tax
Tax-loss harvesting
When you sell a capital asset for less than your basis, you have a capital loss. You can use those losses to offset capital gains. One way to increase your deductible losses is to sell depreciated investments in a taxable account, a strategy known as tax-loss harvesting.
If your capital losses are greater than your capital gains, you can use up to $3,000 to offset ordinary income. Any remaining losses can be carried forward and used to offset capital gains in future tax years
Invest in tax-advantaged accounts
Tax-advantaged accounts, such as IRAs and 401(k)s, allow your investments to grow on a tax-deferred or even tax-free basis. You don't have to pay capital gains on any sales within these accounts in the year they occur.
With a traditional IRA or 401(k), you'll pay taxes when you take distributions from the account. No tax is due on Roth IRA distributions, as long as you've followed the Roth IRA withdrawal rules.
Take advantage of the home sale exclusion
When you sell your home, you get to exclude a certain amount of profit from the sale from your taxable income. That limit is $250,000 for single filers and $500,000 for married couples filing jointly. To qualify, you must have owned the home and used it as your primary residence for at least two of the last five years. You can take advantage of this exclusion once every two years.
Donate appreciated assets
Feeling philanthropic? Rather than selling stock, paying taxes on the capital gains, and then donating cash to your favorite charity, consider donating the stock directly to the organization. This strategy can reduce your tax bill in two ways.
First, you can avoid the capital gains tax you would have owed if you sold the stock. Second, if you itemize deductions, you can claim a charitable deduction for the donated stock's fair market value.
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FAQs
What assets are subject to capital gains?
Stocks, bonds, and real estate are assets subject to capital gains. Collectibles are subject to a higher capital gains tax rate.
How do I report capital gains on my tax return?
To report capital gains and losses and calculate tax owed on your tax return, you'll need Schedule D and Form 8949.
Can I deduct capital losses from my taxes?
You can't directly deduct capital losses from your taxes, but you can use capital losses to offset gains. If you have excess capital losses, up to $3,000 can be used to reduce ordinary income and the rest, if any, can be carried forward to future tax years.
What is the wash sale rule?
The wash sale rule stipulates that if you sell an investment at a loss and buy another "substantially identical" investment within 30 days, you won't be able to deduct your losses. Pay attention to this rule when you're tax-loss harvesting.
What are the current federal capital gains tax rates?
The current short-term capital gains rates match the ordinary income rates, which are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Long-term capital gains rates are 0%, 15%, and 20%, plus a 3.8% net investment income tax for earners with an annual income of $200,000 (or $250,000 if married and filing jointly).
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