Long-term capital gains tax is the tax you pay on profit from selling an asset you owned for more than one year, and it uses a lower tax rate than the income tax on wages or salary.
When you sell a stock, real estate, or other investment for more than you paid for it, that profit is called a capital gain. The tax rate depends on how long you held the asset. If you owned it for more than one year before selling, the gain qualifies as long-term, and the IRS taxes it at preferential rates — currently 0%, 15%, or 20%, depending on your total income for the year. This is fundamentally different from ordinary income tax, which applies to wages, interest, and dividends, and uses rates that go as high as 37%.
The reason for the lower rate is economic policy: Congress wants to encourage people to invest and hold assets long-term rather than trade constantly. A person in the 37% ordinary income tax bracket might pay only 20% on a long-term capital gain from the same dollar amount. That gap — 17 percentage points — is the tax benefit of holding an asset past the one-year mark.
Key Takeaways
- Long-term capital gains are taxed at 0%, 15%, or 20% depending on your income level, while ordinary income is taxed at rates up to 37%.
- An asset must be held for more than one year (not one year exactly) to may have access to for long-term rates; selling after 365 days counts as long-term.
- The tax applies only to the profit, not the full sale price — if you bought a stock for $5,000 and sold it for $7,000, only the $2,000 gain is taxable.
- Long-term and short-term gains are reported separately on your tax return, and short-term gains use your ordinary income tax rate.
- Net investment income tax of 3.8% may explore on top of capital gains tax if your income exceeds certain thresholds ($200,000 for single filers, $250,000 for married filing jointly).
How the holding period works
The IRS counts the holding period from the day after you buy the asset to the day you sell it. If you buy a stock on January 15 and sell it on January 16 of the following year, you have held it for more than one year, and the gain is long-term. If you sell on January 15 of the following year — exactly one year later — it is still short-term because you have not held it for more than one year.
This matters because short-term capital gains are taxed as ordinary income at your full tax bracket rate. A person in the 24% ordinary income bracket who sells a stock after 11 months pays 24% on the gain. The same person selling after 13 months pays 15% (assuming their income level puts them in the 15% long-term bracket). The one-month difference saves them 9 percentage points on that gain.
The holding period clock resets if you sell and buy again. Buying the same stock back does not extend your holding period on the original purchase — you start counting from the new purchase date.
The three long-term capital gains tax rates and which income level triggers each
The IRS sets three long-term capital gains rates, and which one applies to you depends on your taxable income for the year — not your total income, but the amount after deductions. The rates are the same for all types of long-term gains: stocks, bonds, real estate, collectibles (with one exception for collectibles, which can face a 28% rate).
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 | Up to $62,975 |
| 15% | $47,025 to $518,900 | $94,050 to $583,750 | $62,975 to $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
These income thresholds change each year for inflation. The 2024 figures shown above will be different in 2025. You can find the current year's thresholds on the IRS website or in the instructions to Form 1040.
A practical example: a single filer with $40,000 in wages and a $10,000 long-term capital gain has $50,000 in taxable income. The first $7,025 of the gain ($47,025 threshold minus $40,000 wages) is taxed at 0%. The remaining $2,975 is taxed at 15%. The total tax on the gain is roughly $446, not $2,400 (which would be 24% of $10,000 if it were ordinary income).
Long-term gains versus short-term gains on your tax return
You report long-term and short-term capital gains separately on Schedule D (Form 1040), which is the IRS form for reporting all investment sales. Long-term gains go in one section, short-term in another. The IRS then nets them together: if you have $15,000 in long-term gains and $5,000 in short-term losses, your net long-term gain is $10,000.
Short-term gains and losses are netted first, then long-term gains and losses. If the result is a net short-term loss, it offsets long-term gains dollar-for-dollar. Only after netting can you use capital losses to offset ordinary income (up to $3,000 per year; excess losses carry forward to future years).
This structure matters because it determines your tax rate. A $10,000 net long-term gain is taxed at the preferential 0%, 15%, or 20% rate. A $10,000 net short-term gain is taxed as ordinary income at your full bracket rate, which could be 22%, 24%, 32%, 35%, or 37%.
Real estate and the special rules for home sales
Long-term capital gains tax applies to real estate sales, but there is a major exception: if you sell a home you lived in as your primary residence for at least two of the last five years, you can exclude up to $250,000 of gain from tax (or $500,000 if married filing jointly). This exclusion is separate from capital gains tax rates — it means the gain does not count as income at all.
The two-year requirement is different from the one-year holding period for other assets. You must have owned the home and lived in it for at least 24 months during the five years before the sale. You can use this exclusion once every two years. If you sell a home and do not meet the residence test, any gain is treated as a long-term capital gain (if you held it more than one year) and taxed at the 0%, 15%, or 20% rate.
Net investment income tax adds 3.8% in some cases
On top of capital gains tax, you may owe net investment income tax (NIIT), which is an additional 3.8% tax on investment income including capital gains. This tax applies only if your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).
The 3.8% is calculated on the lesser of your net investment income or the amount by which your income exceeds the threshold. If you are single, earn $220,000, and have $30,000 in long-term capital gains, the NIIT applies to $20,000 of the gain (the excess over $200,000), resulting in $760 in additional tax. This is in addition to the 15% or 20% capital gains tax rate.
NIIT is reported on Form 8960 and is separate from your regular income tax and capital gains tax. It is not a capital gains tax itself but a surtax on investment income for higher-income taxpayers.
How to report long-term capital gains when you file
You report capital gains on Schedule D (Form 1040), which asks for the date acquired, date sold, cost basis, and sale price for each transaction. Your broker or investment platform sends you a Form 1099-B showing these details for stocks, bonds, and mutual funds. For real estate, you typically calculate the numbers yourself unless you use a real estate professional.
After you complete Schedule D, the totals transfer to Form 1040. Long-term capital gains go on line 7 (or in the appropriate section of the current form version). The IRS uses this information to calculate your tax at the correct rate based on your income level.
If you have a large number of transactions, you may attach a separate statement to Schedule D rather than listing each one on the form itself. Your tax software or preparer will handle this formatting.
Frequently Asked Questions
Can I choose to treat a long-term gain as short-term to offset short-term losses?
No. The holding period determines the classification automatically — you cannot elect to change it. However, you can choose which shares to sell if you own multiple lots of the same stock, and you can use specific identification to minimize gains or maximize losses in a given year.
What if I inherit stock or real estate — does the holding period start over?
No. When you inherit an asset, you receive a "stepped-up basis," meaning the cost basis is reset to the fair market value on the date of death. This usually eliminates or greatly reduces any gain. Any gain you realize after inheriting is measured from that new basis, and the holding period for long-term treatment starts from the date of inheritance.
Do I owe capital gains tax if I sell at a loss?
No tax is owed on the loss itself. Instead, you can use the loss to offset capital gains from other sales in the same year, or up to $3,000 of ordinary income. Losses beyond that carry forward to future years with no time limit.
Are dividends taxed the same way as long-term capital gains?
may have access to dividends are taxed at the same 0%, 15%, or 20% rates as long-term capital gains, but they are not capital gains — they are income paid by the company while you own the stock. Non-may have access to dividends are taxed as ordinary income. Your broker reports which dividends are may have access to on Form 1099-DIV.
If I buy and sell the same stock multiple times in a year, how do I calculate the gain?
Each sale is a separate transaction with its own holding period and gain or loss. If you buy 100 shares at $50, sell 50 at $60 after six months (short-term loss of $500), then sell the other 50 at $70 after 14 months (long-term gain of $1,000), you report both transactions separately on Schedule D. The short-term loss and long-term gain are netted together.