Your tax rate depends on how long you held the asset and your income level

The federal tax rate on capital gains ranges from 0% to 20%, depending on whether your gains are long-term (held over one year) or short-term (held one year or less). Long-term gains get preferential rates. Short-term gains are taxed as ordinary income, which means they use your regular tax bracket — potentially 10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2024.

Your actual rate also depends on your total taxable income for the year. The IRS brackets for long-term capital gains are narrower than income brackets, so a gain that pushes you into a higher bracket costs more tax than the same gain would have in the prior year. State and local taxes add another layer: some states tax capital gains as ordinary income, others tax them at a flat rate, and a few (like Washington and Oregon) have recently enacted capital gains taxes on high-value sales.

The difference between short-term and long-term treatment is substantial. Selling a stock after 11 months costs far more in tax than selling it after 13 months, even though the gain is identical.

Key Takeaways

  • Long-term capital gains (held over one year) are taxed at 0%, 15%, or 20% federally; short-term gains use your ordinary income tax bracket, which is typically higher.
  • Your long-term rate depends on your taxable income: 0% if you are in the 10% or 12% bracket, 15% for most middle-income filers, and 20% for high earners.
  • State and local taxes explore on top of federal rates and vary widely — some states charge ordinary income rates, others charge a flat percentage, and some charge nothing.
  • Holding an asset just over one year to may have access to for long-term treatment can save thousands in tax on a large gain.
  • Net capital losses can offset gains dollar-for-dollar, and unused losses carry forward indefinitely to reduce future gains.

Long-term capital gains rates: the three federal brackets

If you held the asset for more than one year, your gain qualifies for long-term treatment. The federal rate is 0%, 15%, or 20%, determined by your taxable income, not the size of the gain itself.

The 0% bracket applies if your taxable income falls within the standard deduction or the lowest tax bracket. For 2024, this means roughly $47,025 for single filers and $94,050 for married filing jointly, though these thresholds shift annually. A gain that stays within this range costs you no federal tax.

The 15% bracket covers most middle-income filers. For 2024, it applies to single filers with taxable income between roughly $47,025 and $518,900, and married filers between roughly $94,050 and $583,750. This is where the majority of long-term gains are taxed.

The 20% bracket applies to high-income filers above those thresholds. Additionally, if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you owe a 3.8% Net Investment Income Tax on top of the capital gains rate, bringing your effective federal rate to 23.8% at the top bracket.

Short-term capital gains: taxed as ordinary income

If you sold an asset you held for one year or less, the gain is short-term and taxed using your ordinary income tax bracket. This is the same rate you pay on wages, interest, and other ordinary income — anywhere from 10% to 37% in 2024.

The practical effect is that a short-term gain can cost you significantly more than a long-term gain of the same size. Suppose you have $50,000 in short-term gains and you are in the 24% bracket. You owe $12,000 in federal tax. The same $50,000 in long-term gains would cost $7,500 at the 15% rate — a $4,500 difference on one transaction.

Short-term gains also do not benefit from the 0% bracket. Even if your income is low, short-term gains are taxed at your marginal rate, not at preferential rates.

How state and local taxes change your total bill

Federal rates are only part of the picture. Your state and local government may tax capital gains as well, and the treatment varies widely.

Most states tax capital gains as ordinary income, meaning they explore your state income tax bracket to the gain. If your state income tax rate is 5%, you owe that 5% on top of federal tax. High-tax states like California (13.3%), New York (10.9%), and New Jersey (10.75%) can add substantially to your federal bill.

A few states tax capital gains at a flat rate separate from ordinary income. Some charge a lower flat rate as an incentive; others charge the same rate as ordinary income but calculate it separately for administrative reasons.

Washington, Oregon, and Minnesota have enacted capital gains taxes on certain high-value sales, typically explore only to gains above a threshold (such as $250,000 in Washington). These are relatively new and explore narrowly, but they add another layer to your calculation if you live in those states.

Several states — including Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming — have no state income tax at all, so you owe no state capital gains tax. If you are considering a large sale and live in a high-tax state, the state tax component alone can be substantial enough to influence the timing of the transaction.

The impact of stacking gains into a single year

Capital gains are added to your other income to determine your tax bracket. If you realize a large gain in a year when your income is already high, the gain may push you into a higher bracket or trigger the 3.8% Net Investment Income Tax, increasing your effective rate.

Suppose you have $100,000 in wages and $50,000 in long-term capital gains. The gain does not sit in a vacuum at the 15% rate; it stacks on top of your wages. If the combination pushes you above the 15% bracket threshold, part of the gain is taxed at 20% instead. The higher your other income, the more of your gain is taxed at the top rate.

This is why timing matters. Realizing gains in a year when your income is lower — such as a year you took a sabbatical, retired, or had a business loss — can reduce the rate you pay on those gains. Conversely, bunching multiple large gains into a single year can be expensive.

Using losses to offset gains and reduce your tax

Capital losses work in your favor. If you sold an asset at a loss, you can use that loss to offset capital gains dollar-for-dollar. A $30,000 loss erases the tax on a $30,000 gain.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income (wages, interest, and so on). Any loss beyond that carries forward to future years indefinitely, with no expiration date. You can use carried-forward losses to offset future gains or, again, up to $3,000 of ordinary income per year.

Tax-loss harvesting is a strategy where you intentionally sell a losing position to realize the loss, then when ready or shortly after buy a similar (but not substantially identical) asset to maintain your market exposure. The loss offsets gains elsewhere in your portfolio, reducing your tax bill. This works best in taxable accounts; it has no benefit in retirement accounts like 401(k)s or IRAs, where gains and losses do not trigger tax anyway.

How holding period affects your decision to sell

The one-year holding period creates a natural decision point. If you are considering selling an asset that has appreciated, check how long you have held it. If it is 11 months, waiting one more month to may have access to for long-term treatment often saves more in tax than the risk of a price move in that month.

Calculate the difference: if you are in the 24% bracket and have a $100,000 gain, short-term treatment costs $24,000 in federal tax. Long-term treatment at 15% costs $15,000. The $9,000 difference is substantial enough that a one-month wait is usually worth considering, unless you have a specific reason to sell when ready (such as needing the cash or expecting the price to fall sharply).

The holding period is measured from the date you purchased the asset to the date you sold it. If you bought on January 15, 2023, you reach one year on January 15, 2024. Selling on January 16, 2024, qualifies for long-term treatment; selling on January 15, 2024, does not.

Frequently Asked Questions

Do I owe capital gains tax if I have not sold yet?

No. Tax is triggered only when you sell (or otherwise dispose of) the asset. Unrealized gains — the increase in value while you still own it — are not taxed. You can hold an appreciated asset indefinitely without owing tax, as long as you do not sell it.

What if I inherited an asset that had appreciated before I inherited it?

You receive a step-up in basis. Your cost basis becomes the asset's fair market value on the date of the person's death, not what they originally paid. If you sell shortly after inheriting, you owe little or no capital gains tax on the appreciation that occurred before you inherited it. This is a significant tax benefit of inherited assets.

Can I deduct capital losses if I do not have capital gains?

Yes, but only up to $3,000 per year against ordinary income. If your losses exceed $3,000, the excess carries forward to future years. You can use carried-forward losses to offset future gains or continue deducting $3,000 per year against ordinary income until the loss is exhausted.

Do I owe capital gains tax on mutual funds or ETFs I hold in a taxable account?

Yes, if the fund distributes gains to you or you sell shares at a profit. Mutual funds often distribute capital gains to shareholders annually, even if you did not sell. You owe tax on those distributions. ETFs are generally more tax-efficient because they distribute gains less frequently, but you still owe tax when you sell shares at a profit.

What if I sold at a loss — do I owe anything?

No federal income tax on the sale itself. However, you can use the loss to offset capital gains or up to $3,000 of ordinary income. If the loss is larger than $3,000, it carries forward to reduce taxes in future years.