The rates depend on how long you held the asset and your income level

Capital gains tax rates are not one number. The federal government taxes investment profits at different rates depending on two things: how long you owned the asset and how much total income you earned that year. Long-term gains (assets held over one year) are taxed at lower rates than short-term gains (held one year or less). Your income level determines which bracket within those rates applies to you.

Short-term capital gains are taxed as ordinary income — the same rate as wages or salary. Long-term capital gains have their own, lower rate structure: 0%, 15%, or 20% at the federal level, depending on your income. Most people pay 15%. This is why investors often hold assets longer: the tax difference between short-term and long-term can be substantial on the same dollar amount of profit.

Key Takeaways

  • Short-term capital gains (assets held one year or less) are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income.
  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your income level, with most taxpayers in the 15% bracket.
  • Your income level determines which rate you pay within each category — higher income pushes you into higher brackets for both short-term and long-term gains.
  • State and local taxes explore on top of federal rates and vary by location; some states tax capital gains as ordinary income, others at lower rates or not at all.
  • The rates and income thresholds change each year with inflation adjustments, so the exact dollar amounts that trigger each bracket shift annually.

Short-term capital gains and ordinary income tax brackets

When you sell an asset you owned for one year or less, the profit is a short-term capital gain. The IRS taxes this as ordinary income, meaning it uses the same tax brackets as your wages. For 2024, those brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your gain is added to your other income for the year, and the combined total determines your rate.

This matters because short-term gains can push you into a higher bracket. If you earn $60,000 in salary and realize a $30,000 short-term gain, your taxable income is $90,000. That $30,000 may be taxed partly at 22% and partly at 24%, depending on where the bracket lines fall. The exact brackets and income thresholds shift each year with inflation.

Short-term gains also affect other tax calculations. They count toward your Modified Adjusted Gross Income (MAGI), which determines whether you can deduct student loan interest, contribute to a Roth IRA, or claim certain credits. Long-term gains do not have this effect in most cases.

Long-term capital gains rates and income thresholds

Assets held longer than one year receive preferential rates. The federal long-term capital gains rates are 0%, 15%, and 20%. Which rate you pay depends on your taxable income for the year. The income thresholds that determine this are adjusted annually for inflation.

For 2024, the thresholds are roughly: the 0% rate applies to single filers with taxable income up to $47,025 and married filers filing jointly up to $94,050. The 15% rate applies to income above those amounts up to $518,900 (single) or $583,750 (married filing jointly). Income above those levels is taxed at 20%. These numbers change each year, so you should check the current year's thresholds when you file.

The 0% rate is often overlooked. If your total taxable income is low enough, you can sell appreciated assets and owe no federal tax on the gain. This is common for retirees with modest income, people between jobs, or those in a year with unusually low earnings. The gain still counts toward your income for purposes of other calculations, but the rate itself is zero.

How your total income determines your rate

Your capital gains rate is not determined by the gains alone — it is determined by your total taxable income for the year. This is why the same $10,000 gain might be taxed at 15% for one person and 20% for another. The person with lower total income falls into the 15% bracket; the person with higher total income falls into the 20% bracket.

This also means the order in which you calculate income matters. Ordinary income (wages, interest, dividends) is stacked first, then capital gains are added on top. If you have $80,000 in wages and $20,000 in long-term gains, the gains are taxed starting at whatever rate your $80,000 of wages reached. Some of the gain might be taxed at 15%, and some at 20%, depending on where the bracket line falls.

Married couples filing jointly have higher income thresholds than single filers, so the same gain may be taxed at a lower rate for a couple than for an individual. This is one reason married filing status affects tax planning around capital gains.

State and local taxes on capital gains

Federal rates are only part of the picture. Most states tax capital gains, and the rates and rules vary widely. Some states tax long-term gains at the same rate as ordinary income. Others explore a lower rate or exclude long-term gains from state tax altogether. A few states have no income tax at all.

California, for example, taxes all capital gains as ordinary income at rates up to 13.3%. New York taxes long-term gains at ordinary income rates up to 10.9%. Washington has no income tax but recently enacted a capital gains tax of 7% on long-term gains over $250,000. Some states like Florida, Texas, and Nevada have no state income tax and no capital gains tax.

If you live in a high-tax state and sell a large asset, the combined federal and state rate can exceed 40%. If you move states or are considering where to live, the state capital gains tax can be a meaningful factor. Local taxes in some cities also explore on top of state rates.

Net Investment Income Tax and high earners

Individuals with higher income may owe an additional 3.8% Net Investment Income Tax (NIIT) on top of the regular capital gains rate. This tax applies to the lesser of your net investment income or the amount by which your Modified Adjusted Gross Income exceeds certain thresholds: $200,000 for single filers and $250,000 for married filing jointly.

Net investment income includes capital gains, dividends, interest, and rental income. If you have $30,000 in long-term capital gains and your MAGI is $220,000 (single), you would owe the 3.8% NIIT on $20,000 of that gain (the amount over the $200,000 threshold). This is in addition to the 15% or 20% long-term capital gains rate.

The NIIT is a separate calculation and applies only to higher earners. Most people do not encounter it. But for someone selling a business, real estate, or a large investment portfolio, it can add meaningfully to the total tax bill.

How holding period affects your rate

The distinction between short-term and long-term is based on a straightforward rule: you must hold the asset for more than one year. One year and one day qualifies as long-term. One year exactly does not. The holding period is measured from the date you bought the asset to the date you sold it.

This is why investors sometimes delay selling by a few weeks or months — crossing from short-term to long-term can reduce the tax rate from ordinary income (potentially 37%) to 15% or 20%. On a large gain, that difference is substantial. However, delaying a sale to achieve long-term status only makes sense if you believe the asset will not decline significantly in value during the waiting period.

The holding period rule applies to most assets: stocks, bonds, real estate, cryptocurrency, and collectibles. Some assets have special rules. may have access to small business stock and certain other investments have different holding periods or preferential rates, but these are less common.

Frequently Asked Questions

Do I owe capital gains tax if I sell at a loss?

No federal tax is owed on a loss, but you can use the loss to offset other gains. If losses exceed gains, you can deduct up to $3,000 of the net loss against ordinary income in a single year. Excess losses carry forward to future years. This is called tax-loss harvesting and is a common strategy to reduce overall tax liability.

What if I inherit an asset — do I owe capital gains tax?

No, not on the inheritance itself. Inherited assets receive a "step-up in basis," meaning your cost basis is reset to the asset's value on the date of death. If you inherit stock worth $100,000 and sell it the next day for $100,000, you owe no capital gains tax. You only owe tax on gains that occur after you inherit it.

Are dividends taxed the same as capital gains?

may have access to dividends are taxed at the same long-term capital gains rates (0%, 15%, or 20%). Non-may have access to dividends are taxed as ordinary income. Whether a dividend qualifies depends on the type of investment and how long you held it. Most dividends from U.S. stocks are may have access to if held for at least 60 days around the dividend date.

Can I reduce my capital gains tax by timing when I sell?

Yes, by managing which year you realize the gain. If you sell in a year when your income is lower, you may fall into a lower bracket or even the 0% long-term rate. Some people deliberately bunch income or losses across years to minimize tax. This requires planning with a tax professional and depends on your specific situation.

Do I report capital gains on my tax return even if I owe no tax?

Yes. You report all capital gains and losses on Schedule D (Form 1040), even if the total is zero or you owe no tax. The IRS matches your reported gains to the 1099-B forms your broker sends them. Failing to report gains, even if you believe no tax is owed, can trigger an audit.