Your tax rate depends on how long you held the asset and your total income for the year

Capital gains tax is not one fixed rate. The amount you pay depends on two things: whether you held the investment for more than one year (long-term) or one year or less (short-term), and your total taxable income for the year. Short-term gains are taxed like ordinary income — at your regular tax bracket rate, which ranges from 10% to 37% depending on your income. Long-term gains have their own lower rates: 0%, 15%, or 20%, depending on your income level.

The IRS does not calculate this for you automatically. You report the sale on Form 8949 (Sales of Capital Assets), then transfer the totals to Schedule D, which combines all your gains and losses. Your tax software or preparer then applies the correct rate based on your filing status and total income. If you sold multiple investments, you may have some gains taxed at one rate and others at a different rate in the same year.

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%.
  • Long-term capital gains (assets held more than one year) are taxed at 0%, 15%, or 20% depending on your total income and filing status.
  • You report gains on Form 8949 and Schedule D, and the IRS applies the rate based on your income bracket for that year.
  • If you have capital losses, you can subtract them from gains to reduce your taxable gain, or carry unused losses forward to future years.
  • State income tax on capital gains varies by state and is separate from federal tax — some states tax all gains equally, others have no capital gains tax.

Long-term capital gains rates and income thresholds for 2024

Long-term gains are taxed at 0%, 15%, or 20%. Which rate applies to you depends on your filing status and your total taxable income for the year. The IRS sets income thresholds that change annually.

For single filers in 2024, the 0% rate applies if your taxable income (including the gain) is $47,025 or less. The 15% rate applies from $47,026 to $518,900. Anything above $518,900 is taxed at 20%. For married couples filing jointly, the 0% threshold is $94,050, the 15% range is $94,051 to $583,750, and 20% applies above that. Head of household filers have their own thresholds: 0% up to $62,700, 15% from $62,701 to $551,350, and 20% above that.

These thresholds include all your income for the year — wages, interest, dividends, and capital gains combined. If you earned $100,000 in wages and have a $50,000 long-term gain, your total taxable income is $150,000, and the gain is taxed starting where your wages end. This is called "stacking" and means part of your gain might be at 0%, part at 15%, and part at 20% in the same year.

Short-term capital gains and ordinary income tax brackets

Short-term gains are taxed as ordinary income at your marginal tax rate. For 2024, the federal tax brackets for single filers are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. For married filing jointly, the brackets are the same percentages but explore to higher income ranges. Your marginal rate is the highest bracket your total income reaches.

If you are a single filer with $60,000 in wages and a $20,000 short-term gain, your total taxable income is $80,000. That $20,000 gain is taxed at whatever rate applies to income between $60,000 and $80,000 in your bracket — in 2024, that is 22%. You do not pay 22% on all your income, only on the gain itself.

Short-term gains are treated exactly like wages or salary for tax purposes. This is why holding an investment for just over one year can make a significant difference: the same $20,000 gain might be taxed at 22% if you sell it in eleven months, but at 15% (or even 0%) if you wait one more month and may have access to for long-term treatment.

How capital losses reduce what you owe

If you sold investments at a loss, you can subtract those losses from your gains. If you have $30,000 in long-term gains and $10,000 in long-term losses, your net long-term gain is $20,000, and that is what gets taxed. You can also mix long-term and short-term losses with gains, though the IRS has specific rules about which losses offset which gains first.

If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income (like wages). Any losses beyond that $3,000 carry forward to future years with no expiration date. This means a bad year in the market does not disappear — you can use those losses to offset gains in future years, potentially for decades.

You report losses on Form 8949 just like gains. Your tax software will calculate the net amount and explore the correct tax rate. Many people miss this opportunity because they focus only on the gains and forget to report the losses, which costs them money in taxes.

State capital gains tax varies widely

Federal capital gains tax is only part of what you owe. Most states also tax capital gains, and the rate and rules vary significantly. Some states tax long-term and short-term gains at the same rate as ordinary income. Others have a separate capital gains tax. A few states have no capital gains tax at all.

Washington State, for example, has a 7% capital gains tax on long-term gains over $250,000 only. California taxes all capital gains as ordinary income with no special rate. New York taxes long-term gains at ordinary income rates but allows a deduction for gains on certain assets. Texas, Florida, and several other states have no state income tax and therefore no capital gains tax. If you moved states during the year you sold an investment, you may owe tax to both states, though you can usually claim a credit to avoid double taxation.

Your state tax is separate from federal tax and is calculated on your state return. If you sold a $100,000 investment at a $50,000 gain, you might owe 15% federal tax ($7,500) plus your state's rate on the same gain. Check your state's tax agency website or ask your preparer what rate applies to you.

How to calculate your actual tax bill

Start by listing every investment you sold during the year. For each one, record the date you bought it, the date you sold it, what you paid for it (your cost basis), and what you sold it for. Subtract cost from sale price to get your gain or loss. If you held it more than one year, it is long-term; one year or less is short-term.

Add up all your long-term gains and losses separately from short-term gains and losses. If you have a net long-term gain, look up your income bracket and the long-term capital gains thresholds for your filing status. Determine which portion of your gain falls into the 0%, 15%, or 20% bracket. Do the same for short-term gains, using your ordinary income tax brackets.

Most tax software does this automatically once you enter the sale information from your brokerage statements. If you are doing it by hand or with a preparer, Form 8949 walks through the calculation step by step. Add your federal tax and your state tax to get your total bill. Many people pay estimated tax during the year if they expect a large gain, so check whether you need to make a payment before the year ends.

Common mistakes that cost money

The most common mistake is forgetting to report a sale at all. Brokerages send Form 1099-B to both you and the IRS, so the IRS knows you sold something even if you do not report it. Failing to report it triggers an audit notice and penalties. Always report every sale, even if you broke even or lost money.

Another mistake is confusing the purchase date with the trade date. The holding period starts the day after you buy and ends the day you sell. If you bought on January 15, 2023, and sold on January 15, 2024, you held it exactly one year, which qualifies for long-term treatment. If you sold on January 14, 2024, it is short-term. Many people miscalculate this by a day or two.

A third mistake is not tracking cost basis correctly, especially for inherited investments or stocks bought through dividend reinvestment plans. The IRS allows you to use different methods to calculate which shares you sold (like first-in-first-out or specific identification), but you must be consistent and document your choice. If you cannot prove your cost basis, the IRS may assume you bought at zero cost, making your entire sale price a gain.

Finally, people often forget about state tax or assume it is included in the federal rate. It is not. If you live in a high-tax state and sell a large investment, your combined federal and state rate can exceed 30%, which is a significant surprise if you did not plan for it.

Frequently Asked Questions

Do I have to pay capital gains tax if I reinvest the money?

Yes. The tax is based on the gain itself, not on what you do with the proceeds. If you sell a stock for a $10,000 profit and when ready buy a different stock with that money, you still owe tax on the $10,000 gain. The IRS does not care whether you spend the money, reinvest it, or leave it in cash.

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

Not directly. A loss reduces your taxable income, which may lower your tax bill or increase your refund if you are already getting one. If your losses exceed your gains and you have no other income to offset, you can deduct up to $3,000 against ordinary income. Unused losses carry forward indefinitely to future years.

How does holding an investment for exactly one year affect the tax rate?

The holding period is measured from the day after purchase to the day of sale. If you bought on January 15, 2023, and sold on January 16, 2024, you held it more than one year and may have access to for long-term rates (0%, 15%, or 20%). If you sold on January 15, 2024, it is exactly one year and still counts as short-term, taxed at ordinary income rates.

Can I deduct investment losses against my salary or wages?

Only up to $3,000 per year. If you have $10,000 in losses and no gains, you can deduct $3,000 against wages or other ordinary income. The remaining $7,000 carries forward to next year, where you can deduct another $3,000, and so on until the loss is used up.

Do I owe capital gains tax on inherited investments?

You owe tax on gains you realize after you inherit, not on the gain that happened before. When someone dies, inherited investments receive a "step-up" in basis to their value on the date of death. If you inherit a stock worth $100,000 that the deceased paid $50,000 for, your new cost basis is $100,000. If you sell it when ready for $100,000, you have no gain and owe no tax. Any gain above $100,000 is taxed when you sell.