Long-term capital gains tax is a lower tax rate applied when you sell an investment you've held for more than one year

When you sell a stock, mutual fund, rental property, or other investment for a profit, the IRS taxes that gain. The rate you pay depends on how long you owned it. If you held the asset for more than one year before selling, you pay the long-term capital gains rate. This rate is lower than the rate for assets you sell within a year, and it's also lower than your ordinary income tax rate.

The long-term rate is 0%, 15%, or 20%, depending on your total income for the year. This is different from short-term capital gains, which are taxed as ordinary income at rates up to 37%. For most people, the difference between long-term and short-term rates saves hundreds or thousands of dollars on a single sale.

Key Takeaways

  • Long-term capital gains rates are 0%, 15%, or 20% — all lower than ordinary income tax rates, which go up to 37%.
  • You may have access to for the long-term rate only if you owned the asset for more than one year before you sold it; one year or less is short-term.
  • The rate you pay depends on your total taxable income for the year, not on the size of the gain itself.
  • You report long-term gains on Schedule D (Form 1040) and calculate your tax using the IRS worksheets or tax software.
  • Some gains may also be subject to a 3.8% net investment income tax if your modified adjusted gross income exceeds certain thresholds.

The three long-term capital gains tax rates and who pays each one

The IRS sets three brackets for long-term capital gains, and your bracket depends on your taxable income for the year — not the amount of the gain. The brackets change each year and are different for single filers, married filing jointly, and other filing statuses.

The 0% rate applies to the lowest income earners. 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. If your income falls in this range, you owe no federal tax on long-term capital gains, though you still report them on your return.

The 15% rate is the middle bracket and applies to most people who sell investments. For 2024, single filers with taxable income between $47,026 and $518,900 pay 15%. Married filing jointly pay 15% on gains within the $94,051 to $583,750 range. This is where the majority of investors fall.

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 filing jointly pay 20% on income over $583,750. These thresholds are adjusted annually for inflation.

How to determine whether your gain qualifies as long-term

The holding period is straightforward: you must own the asset for more than one year. The IRS counts from the day after you buy it to the day you sell it. If you buy a stock on March 15 and sell it on March 15 the next year, that is exactly one year, and the gain is short-term. You must sell on March 16 or later for it to be long-term.

The purchase date is the settlement date, not the trade date. When you buy stock through a broker, the trade happens when ready, but settlement — when the shares are actually transferred to your account — occurs two business days later. That settlement date is what counts for the holding period.

For inherited assets, the holding period is always long-term, regardless of how long the deceased person owned it or how long you have owned it since inheriting. This is one of the few exceptions to the one-year rule.

How income level affects which tax rate you pay

Your tax bracket for long-term gains is determined by your total taxable income, which includes wages, interest, dividends, and other income — not just the capital gain itself. This means a large gain can push you into a higher bracket and increase your tax rate.

For example, suppose you are single and earn $40,000 in wages. You then sell an investment and realize a $20,000 long-term gain. Your taxable income is now $60,000. The first $7,025 of your gain falls in the 0% bracket (up to $47,025). The remaining $12,975 falls in the 15% bracket. You pay 0% on the first portion and 15% on the second, for a blended rate of about 10.8% on the entire gain.

This is why the order of income matters. Ordinary income (wages, interest) fills up your brackets first, then capital gains sit on top. If you have a large gain and high ordinary income, you may pay 20% on the entire gain.

The net investment income tax and when it applies

In addition to the long-term capital gains tax, you may owe a 3.8% net investment income tax if your modified adjusted gross income (MAGI) exceeds certain thresholds. This tax was enacted in 2013 and applies to investment income, including long-term capital gains.

For 2024, the MAGI thresholds are $200,000 for single filers and $250,000 for married filing jointly. If your MAGI exceeds these amounts, you pay 3.8% on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.

This tax is separate from the long-term capital gains rate. You could pay 15% in long-term capital gains tax plus 3.8% in net investment income tax, for a combined federal rate of 18.8%. You report this tax on Form 8960 and attach it to your Form 1040.

How to report long-term capital gains on your tax return

You report all capital gains and losses on Schedule D (Form 1040), which is part of your federal tax return. Part I of Schedule D is for short-term gains and losses. Part II is for long-term gains and losses. You list each transaction separately: the asset name, the date acquired, the date sold, the cost basis, the sale price, and the gain or loss.

If you have only a few transactions, you can enter them directly on Schedule D. If you have many transactions — especially from a brokerage account — your broker will send you a Form 1099-B, which lists all your sales for the year. You can attach this to your return or use it to fill in Schedule D.

After you complete Schedule D, you transfer the totals to Form 1040. If you have a net long-term gain, you also complete the Capital Gains Tax Worksheet in the Form 1040 instructions to calculate your tax. This worksheet determines which portions of your gain fall into the 0%, 15%, and 20% brackets. Most tax software performs this calculation automatically.

State and local taxes on long-term capital gains

Federal long-term capital gains rates are 0%, 15%, or 20%, but most states also tax capital gains. State rates vary widely. Some states, like Florida and Texas, do not tax capital gains at all. Others, like California and New York, tax long-term gains as ordinary income at rates up to 13% or more.

A few states have recently enacted separate long-term capital gains taxes. Washington State, for example, imposes a 7% tax on long-term gains over $250,000. These state taxes are in addition to federal tax, so your total rate can be significantly higher than the federal rate alone.

You report state capital gains on your state tax return, which usually follows the same Schedule D format as the federal return. Check your state's tax department website for the specific rules and rates in your state.

Frequently Asked Questions

What is the difference between long-term and short-term capital gains tax?

Long-term gains are taxed at 0%, 15%, or 20% if you held the asset for more than one year. Short-term gains are taxed as ordinary income at rates up to 37%. For most people, long-term rates are significantly lower. A $10,000 short-term gain might cost $2,400 in federal tax, while the same $10,000 long-term gain might cost $1,500.

Can I avoid long-term capital gains tax by holding an asset for exactly one year?

No. You must hold the asset for more than one year — meaning you sell on day 366 or later. Selling on day 365 results in short-term treatment. The IRS counts from the day after purchase to the day of sale, so if you buy on January 15, you must sell on January 16 of the following year or later.

Do I pay long-term capital gains tax if I sell at a loss?

No. If you sell an asset for less than you paid for it, you have a capital loss, not a gain. You do not owe tax. You can use the loss to offset other capital gains or up to $3,000 of ordinary income in the same year. Excess losses carry forward to future years.

What happens to my long-term capital gains if I die before selling?

Your heirs receive a "stepped-up basis," meaning their cost basis is the asset's value on the date of your death, not your original purchase price. If they sell shortly after inheriting, they owe little or no capital gains tax. This eliminates the tax on gains that occurred during your lifetime.

How do I know my modified adjusted gross income for the net investment income tax?

Modified adjusted gross income is usually your adjusted gross income (AGI) from Form 1040, line 11, with certain modifications added back. For most people, it is the same as AGI. You calculate it on Form 8960 if you owe the 3.8% net investment income tax. Your tax software or preparer can determine this for you.