Capital gains tax rates depend on how long you held the asset and your income level

The capital gains tax rate is the percentage of tax you owe on profit from selling an investment. The IRS taxes investment gains at different rates depending on two things: whether you held the asset for more than one year (long-term) or one year or less (short-term), and your total taxable income for the year.

Short-term capital gains are taxed as ordinary income — the same rate as your wages or salary. Long-term capital gains have their own lower rate structure: 0%, 15%, or 20%, depending on your income bracket. Most people pay 15% on long-term gains. The 0% rate applies only to lower-income filers; the 20% rate applies only to the highest earners.

Your holding period matters because Congress designed long-term rates to encourage people to hold investments longer rather than trade constantly. The difference between short-term and long-term rates can be substantial — sometimes 20 percentage points or more.

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 income.
  • Long-term capital gains (assets held more than one year) are taxed at 0%, 15%, or 20% depending on your total taxable income for the year.
  • Your filing status (single, married filing jointly, head of household) determines which income thresholds put you in each long-term rate bracket.
  • The IRS recalculates these income thresholds every year, so your rate can change year to year even if your holding period stays the same.

How short-term capital gains are taxed

When you sell an investment you owned for one year or less, the profit is a short-term capital gain. The IRS treats this gain as ordinary income and taxes it at your regular income tax bracket. If you are in the 24% tax bracket for wages, you pay 24% on short-term gains too.

This is why short-term gains are often more expensive than long-term gains. A person in the 37% bracket who sells a stock after holding it for six months pays 37% tax on the profit. That same person holding the stock for 13 months pays only 20% on the same profit.

Short-term gains add to your other income for the year, which can push you into a higher bracket. If you have $50,000 in wages and $30,000 in short-term gains, the IRS treats you as having $80,000 in taxable income for the year.

How long-term capital gains are taxed

When you sell an investment you owned for more than one year, the profit is a long-term capital gain. These gains are taxed at preferential rates: 0%, 15%, or 20%. Which rate you pay depends entirely on your taxable income for the year, not on how much profit you made.

The 0% rate applies to lower-income filers. For 2024, single filers with taxable income up to $47,025 pay 0% on long-term gains. For married couples filing jointly, the threshold is $94,050. These thresholds change every year.

The 15% rate applies to middle-income filers. For 2024, single filers with taxable income between $47,026 and $518,900 pay 15% on long-term gains. Married couples filing jointly pay 15% on gains if their income falls between $94,051 and $583,750.

The 20% rate applies to high-income filers. For 2024, single filers with taxable income over $518,900 pay 20% on long-term gains. Married couples filing jointly pay 20% if their income exceeds $583,750.

Why your filing status changes your rate

The income thresholds for each long-term capital gains rate are different depending on whether you file as single, married filing jointly, married filing separately, or head of household. Married couples filing jointly have much higher thresholds before they enter the 15% or 20% brackets.

For example, in 2024, a single filer enters the 20% bracket at $518,900 in taxable income. A married couple filing jointly does not enter the 20% bracket until $583,750. This is one reason married couples filing jointly often have a tax advantage on investment income.

Your filing status is determined by your marital status on December 31 of the tax year. If you are divorced or separated by that date, you cannot file as married filing jointly for that year, even if you were married for most of it.

How the IRS counts your holding period

The holding period starts the day after you buy the asset and ends the day you sell it. If you buy a stock on January 15 and sell it on January 15 of the next year, you have held it for exactly one year, and it qualifies for long-term treatment.

If you sell on January 14 of the next year, you have held it for 364 days, and it is treated as short-term. The IRS counts the day of sale but not the day of purchase. This matters most when you are close to the one-year mark.

For inherited assets, the holding period does not matter. Heirs receive what is called a stepped-up basis, which means the cost basis resets to the asset's value on the date of death. An heir who sells an inherited stock the day after inheriting it pays 0% long-term capital gains tax, not short-term rates.

How to report capital gains on your tax return

You report capital gains on Schedule D (Form 1040), which lists each sale separately. Your brokerage sends you a Form 1099-B in January listing all sales from the previous year. You use this form to fill out Schedule D.

On Schedule D, you list short-term gains in one section and long-term gains in another. The form calculates your net short-term gain (all short-term sales combined) and your net long-term gain (all long-term sales combined). If you have losses, they offset gains in the same category first.

If your total capital gains and losses are straightforward — for example, you sold one stock at a gain and nothing else — many tax software programs can walk you through Schedule D step by step. If you have many transactions or losses to carry forward, a tax professional can save time and catch errors.

What happens if you have capital losses

Capital losses work in the opposite direction. If you sell an investment for less than you paid for it, you have a capital loss. You can use losses to offset gains dollar-for-dollar. If you have $10,000 in long-term gains and $3,000 in long-term losses, your net long-term gain is $7,000.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against your ordinary income (wages, salary, interest). Any loss beyond $3,000 carries forward to future years and can be used to offset future gains or deducted at $3,000 per year.

Short-term losses offset short-term gains first, and long-term losses offset long-term gains first. Only after each category is balanced do losses from one category offset gains in the other.

Frequently Asked Questions

Do I pay capital gains tax on investments I still own?

No. You pay capital gains tax only when you sell. Unrealized gains — profit on investments you still hold — are not taxed. You can own an investment worth twice what you paid and owe no tax until you sell it.

What if I sell at a loss — do I get a refund?

No refund, but losses reduce your tax bill. You can deduct up to $3,000 of net capital losses against your ordinary income each year. Losses beyond that carry forward to future years. If you have $5,000 in losses, you deduct $3,000 this year and $2,000 next year.

Can I choose whether to treat a sale as short-term or long-term?

No. The IRS determines this based on your actual holding period. If you held the asset more than one year, it is long-term, regardless of what you want. You cannot elect to pay short-term rates to offset other losses.

Do state taxes explore to capital gains too?

Most states tax capital gains as ordinary income. A few states — including Washington, Tennessee, and Florida — do not tax capital gains at all. A handful of others tax only certain types of gains, like those from selling real estate. Your state's rules are separate from federal rates.

What if my income changes year to year — does my capital gains rate change?

Yes. Your capital gains rate is determined by your total taxable income in the year you sell. If you have a high-income year, you might pay 20% on gains. In a lower-income year, you might pay 15% or even 0% on the same type of investment. This is why timing sales across years sometimes matters.