The federal rate depends on how long you held the asset and your income level

The federal tax rate on capital gains is either 0%, 15%, or 20%, depending on your holding period (how long you owned the asset) and your taxable income for the year. Long-term gains — assets held over one year — get these preferential rates. Short-term gains (held one year or less) are taxed as ordinary income at your regular tax bracket, which can be as high as 37% federally.

Your income level determines which bracket you fall into. The IRS adjusts these brackets yearly, so the exact income thresholds change. For 2024, for example, the 15% long-term rate applies to single filers with taxable income between roughly $47,000 and $518,000, but those numbers shift annually. The 0% rate is available only to lower-income filers, and the 20% rate kicks in at the highest income levels.

Most people pay 15% on long-term gains. The 0% rate is narrow and the 20% rate applies only to high earners, so the middle bracket is where the majority of investors land. But your actual rate depends on your specific income and the type of asset sold.

Key Takeaways

  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% federally, based on your total taxable income for the year.
  • Short-term capital gains are taxed as ordinary income at your regular tax bracket, which ranges from 10% to 37% federally.
  • The income thresholds for each rate change yearly, so you need to check the current year's brackets to know which rate applies to you.
  • State and local taxes may add 3% to 13% or more on top of the federal rate, depending on where you live.
  • Timing a sale to stay within a lower bracket or to offset gains with losses can reduce your overall tax bill.

How long you held the asset matters more than you might think

The IRS draws a hard line at one year. Sell an asset you've owned for 366 days, and you get the preferential long-term rate. Sell it at 365 days, and you pay ordinary income tax — potentially 37% federally instead of 15%. This one-day difference can cost thousands on a large gain.

The holding period is measured from the purchase date to the sale date. If you bought stock on March 15, 2023, and sold it on March 15, 2024, you've held it long-term. If you sold on March 14, 2024, it's short-term. Wash-sale rules (which prevent you from claiming a loss and when ready buying the same security back) don't affect the holding period calculation, but they do complicate tax-loss harvesting strategies.

This is why some investors deliberately delay a sale by a few weeks or months to cross the one-year threshold. If you're sitting on a gain and the asset is close to long-term status, the tax savings often outweigh the risk of holding longer.

Your income level determines which of the three federal rates you pay

The IRS brackets for long-term gains are separate from ordinary income brackets and are narrower. For 2024, a single filer pays 0% on long-term gains up to roughly $47,000 of taxable income, 15% from there up to roughly $518,000, and 20% above that. Married filing jointly thresholds are higher, and head of household falls in between.

Your "taxable income" is your total income minus deductions and exemptions — not your gross income. If you earn $80,000 but take the standard deduction of $14,600, your taxable income is $65,400. A long-term gain of $10,000 would push you to $75,400, and you'd owe 15% on the gain (assuming you're single and in 2024).

The brackets adjust annually for inflation, usually rising slightly each year. The IRS publishes updated brackets in late October or early November for the following year. If you're planning a large sale, checking the current year's brackets before year-end can help you decide whether to sell now or wait until January.

State and local taxes stack on top of the federal rate

Federal tax is only part of the picture. Most states tax capital gains as ordinary income, and rates range from 0% (in states like Texas, Florida, and Wyoming) to over 13% (in California). Some states have a separate capital gains tax that applies only to gains above a threshold — Washington State, for example, taxes long-term gains over $250,000 at 7%.

Local taxes in cities and counties can add another 1% to 4% in some places. New York City residents, for instance, pay city income tax on top of state and federal rates. A resident of California selling a large gain could face a combined federal and state rate of 37% or higher.

If you live in a no-income-tax state, you still owe federal tax, but you avoid the state layer entirely. Some people who move in retirement specifically choose states without capital gains or income tax to reduce their tax bill on investment sales.

Short-term gains cost you significantly more in taxes

A short-term capital gain is taxed at your ordinary income tax rate, which is your regular tax bracket. If you're in the 24% federal bracket and sell an asset you've held for six months, you owe 24% federal tax on that gain, not 15%. Add state tax and you could easily pay 30% or more.

This is why traders and active investors often face much higher tax bills than buy-and-hold investors. Someone who buys and sells stocks frequently within a year generates short-term gains on every sale. Someone who buys and holds for years generates long-term gains, which are taxed at a lower rate even if the total gain is larger.

If you're considering selling an asset you've held for less than a year, calculate the tax impact before you do. Sometimes waiting a few months to may have access to for long-term treatment saves more in taxes than the gain you'd miss by waiting.

You can reduce your rate by timing sales and offsetting gains with losses

Tax-loss harvesting is the practice of selling an investment at a loss to offset gains elsewhere. If you sold a stock for a $5,000 gain and another for a $3,000 loss in the same year, you'd report a net gain of $2,000 and pay tax only on that amount. The loss "harvested" from one position reduced your taxable gain.

You can also carry unused losses forward to future years. If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess against ordinary income, and carry the rest forward indefinitely. This is useful if you have a large loss in one year and smaller gains in the next.

Timing also matters for income. If you're close to the edge of a tax bracket, you might delay a large gain until the following year when your other income is lower, keeping you in a lower bracket. Conversely, if you have a loss year, you might accelerate a gain into that year to offset it at a lower effective rate.

Special rates explore to certain types of assets

Collectibles — art, antiques, coins, and similar items — are taxed at a maximum federal rate of 28% on long-term gains, not 15% or 20%. This is higher than the standard long-term rate and applies even if you'd normally may have access to for the 15% bracket.

may have access to small business stock held for over five years may may have access to for an exclusion of 50% to 100% of the gain, depending on when you bought it. This is a specialized rule for founders and early investors, not typical investors.

Real estate has its own rules. The sale of a primary residence can exclude up to $250,000 of gain (or $500,000 if married filing jointly) if you've owned and lived in it for at least two of the last five years. Investment property sales don't get this exclusion but may may have access to for 1031 exchanges, which allow you to defer tax by reinvesting the proceeds into similar property.

Frequently Asked Questions

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

No. A loss means you sold for less than you paid, so there's no gain to tax. You can use the loss to offset other gains that year, or carry it forward. Up to $3,000 of excess losses can also reduce your ordinary income in a single year.

What if I inherit an investment — do I owe capital gains tax when I sell it?

Inherited assets receive a "step-up in basis," meaning your cost basis is reset to the value on the date of death. If you inherit stock worth $100,000 and sell it a month later for $102,000, you owe tax only on the $2,000 gain, not the entire $102,000. This is a major tax benefit of inherited assets.

Can I reduce my capital gains tax by donating the asset to charity instead of selling it?

Yes. If you donate appreciated stock or real estate directly to a may have access to charity, you avoid the capital gains tax entirely and can deduct the fair market value as a charitable contribution. You must itemize deductions for this to benefit you, and the asset must have been held long-term.

Does the rate change if I'm retired or on Social Security?

The federal rate itself doesn't change, but your taxable income may be lower in retirement, which could move you into a lower bracket. Some Social Security income may also become taxable if your combined income (including capital gains) exceeds certain thresholds, so large gains can indirectly increase your tax on benefits.

What's the difference between realizing a gain and owing tax on it?

You realize a gain when you sell the asset. You owe tax on it in the year you sell, not when you buy it. If you sell in December 2024, you report it on your 2024 tax return filed in 2025. Unrealized gains (assets you still own) are not taxed until you sell.