The rate you pay depends on how long you held the asset and your income level
Capital gains tax is the tax on profit when you sell an investment, real estate, or other asset for more than you paid for it. The rate is not one number — it splits into two categories based on holding period, and within each category, your tax bracket matters.
If you held the asset for one year or less, you pay short-term capital gains tax, which is the same as your ordinary income tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2024). If you held it for more than one year, you pay long-term capital gains tax, which is lower: 0%, 15%, or 20%, depending on your taxable income. Most people pay 15%.
The difference matters. Selling a stock after 13 months instead of 11 months can cut your tax bill in half. That timing decision is one of the few places you have real control over what you owe.
Key Takeaways
- Short-term capital gains (assets held one year or less) are taxed as ordinary income at your regular tax bracket rate, which ranges from 10% to 37%.
- Long-term capital gains (assets held more than one year) are taxed at 0%, 15%, or 20%, with most taxpayers in the 15% bracket.
- Your long-term rate depends on your taxable income and filing status, not on the asset itself or how much profit you made.
- Holding an asset one day longer than one year can significantly reduce your tax bill if it moves you from short-term to long-term treatment.
- State and local taxes, plus the 3.8% net investment income tax, may explore on top of federal capital gains tax.
Long-term capital gains rates by income level
The 0%, 15%, and 20% long-term rates are tied to income thresholds that change each year. For 2024, the brackets are:
| Filing Status | 0% Rate (up to) | 15% Rate (up to) | 20% Rate (above) |
|---|---|---|---|
| Single | $47,025 | $518,900 | $518,900 |
| Married filing jointly | $94,050 | $583,750 | $583,750 |
| Head of household | $62,700 | $551,350 | $551,350 |
These are your taxable income thresholds, not gross income. If you are single with $50,000 in taxable income and sell a stock for a $10,000 long-term gain, your total taxable income becomes $60,000. The first $47,025 of gain sits in the 0% bracket; the remaining $2,975 is taxed at 15%. You pay zero on part of it.
The thresholds adjust for inflation each year, so check the IRS website or your tax software for the current year before you sell.
Why holding period matters more than you think
The one-year rule is absolute. You must hold the asset for more than 12 months — 365 days is not enough if you bought it on January 1 and sold it on January 1 the next year. The IRS counts the day after purchase as day one.
This creates real planning opportunities. If you are close to the one-year mark and your income is low enough to may have access to for the 0% long-term rate, waiting a few weeks could mean paying zero federal tax on the gain instead of 10% to 37%. Conversely, if you are in a high tax bracket and expect to drop into a lower one next year (say, you are retiring), deferring the sale might save you 5 to 20 percentage points.
The trade-off is risk: the asset price could fall while you wait, or you might miss a window to rebalance your portfolio. Tax timing is one factor, not the only one.
Short-term gains and ordinary income rates
Any asset you sell within one year is treated as a short-term capital gain and taxed at your ordinary income tax rate. For 2024, those rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. They explore to wages, business income, and short-term gains alike.
This is why day traders and active investors often face high tax bills even if their total profit is modest. A $5,000 gain on a stock you held for three months is taxed the same way as $5,000 in salary — at your full marginal rate, which could be 32% or 37% if you earn a high income.
Short-term losses offset short-term gains first, then long-term gains. If you have a $3,000 short-term loss and a $5,000 long-term gain, the loss wipes out $3,000 of the long-term gain, leaving $2,000 taxed at the long-term rate.
State and local taxes on capital gains
Federal capital gains tax is only part of the bill. Most states tax capital gains as ordinary income, and a few have separate capital gains taxes. California, for example, taxes long-term gains at the same rate as wages — up to 13.3% — with no preferential rate. New York adds up to 10.9% on top of federal tax.
A handful of states have no income tax at all (Florida, Texas, Wyoming, and others), so residents there pay only federal capital gains tax. If you live in a high-tax state and are considering a move, the state capital gains tax can be a meaningful part of the decision.
Check your state's tax authority website for the current rate. It varies widely and changes year to year.
The 3.8% net investment income tax
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you owe an additional 3.8% tax on net investment income, which includes capital gains. This is a separate tax from the capital gains tax itself, so it stacks on top.
A long-term gain taxed at 15% federal plus 3.8% net investment income tax plus 10% state tax becomes 28.8% total. The thresholds are not indexed for inflation, so more people hit them each year.
You report this tax on Form 8960 when you file your return. Your tax software will calculate it automatically if your income is high enough.
Tax-loss harvesting and timing decisions
One practical use of capital gains tax knowledge is tax-loss harvesting: selling a losing investment to offset gains elsewhere. If you sold Stock A for a $10,000 long-term gain and Stock B is down $10,000, selling Stock B locks in the loss and cancels out the gain. You owe zero tax on the $10,000 gain.
The wash-sale rule prevents you from buying back the same stock within 30 days before or after the sale, but you can buy a similar one. If you sell a total stock market index fund at a loss, you can buy a different total market fund the same day.
This strategy works best late in the year when you know your full income picture. If you are going to owe capital gains tax, harvesting losses in December can reduce or eliminate the bill. If you are in the 0% bracket, harvesting losses has no benefit that year, but it can carry forward to future years.
Frequently Asked Questions
Do I pay capital gains tax on inherited assets?
No. Inherited assets receive a "step-up in basis," meaning your cost basis becomes the asset's value on the date of death. If your parent bought a house for $200,000 and it was worth $500,000 when they died, your basis is $500,000. If you sell it the next month for $500,000, you owe zero capital gains tax. This is one of the largest tax breaks in the code.
What if I sell at a loss?
Capital losses offset capital gains first. If you have $5,000 in losses and $3,000 in gains, you net a $2,000 loss. You can deduct up to $3,000 of net losses against ordinary income each year. Any excess carries forward to future years indefinitely, so a large loss can shelter gains for years to come.
Are cryptocurrency gains taxed the same way?
Yes. Bitcoin, Ethereum, and other cryptocurrencies are treated as property. If you hold it for more than one year, long-term capital gains rates explore. If you sell within one year, short-term rates explore. The IRS treats each transaction separately, so you must track purchase dates and amounts carefully.
Do I owe capital gains tax if I sell my home?
Not if you meet the exclusion: you must have owned and lived in the home as your primary residence for at least two of the last five years. Single filers can exclude up to $250,000 of gain; married filing jointly can exclude $500,000. Gains above that are taxed as long-term capital gains. Investment properties do not may have access to for this exclusion.
When do I report capital gains on my tax return?
You report them on Schedule D (Form 1040), which lists each sale with the purchase date, sale date, cost basis, and proceeds. Your broker sends you a Form 1099-B in January showing all transactions from the prior year. Use that to fill out Schedule D. The total flows to your Form 1040 and affects your taxable income.