The federal capital gains tax rate depends on your income level and how long you held the asset
The federal government taxes profit from selling investments at one of three rates: 0%, 15%, or 20%. Which rate applies to you depends on two things: your total income for the year and whether you held the investment for more than one year. Long-term capital gains (assets held over one year) get the preferential rates. Short-term capital gains (assets held one year or less) are taxed as ordinary income at your regular tax bracket rate, which can be as high as 37%.
The income thresholds that determine your rate change each year and vary based on your filing status. For 2024, the 0% rate applies to single filers with taxable income up to $47,025, married filing jointly up to $94,050, and heads of household up to $63,000. The 15% rate applies to income above those thresholds up to certain higher limits. Income above those higher limits is taxed at 20%. These thresholds increase slightly each year for inflation.
Key Takeaways
- Long-term capital gains are taxed at 0%, 15%, or 20% depending on your total income for the year, while short-term gains are taxed at your ordinary income tax rate.
- The income thresholds that determine which rate you pay change annually and depend on whether you file as single, married filing jointly, or head of household.
- You must hold an investment for more than one year for it to may have access to as a long-term capital gain and receive the lower rates.
- State and local taxes may also explore to your capital gains on top of the federal tax.
Long-term versus short-term capital gains rates
The holding period matters because it determines whether you get the preferential rates. If you sell an investment you have owned for more than one year, the profit is a long-term capital gain and is taxed at 0%, 15%, or 20% depending on your income. If you sell an investment you have owned for one year or less, the profit is a short-term capital gain and is taxed as ordinary income at your regular tax bracket rate.
Short-term capital gains rates are higher because they are treated the same way as wages or salary income. For 2024, ordinary income tax rates range from 10% to 37% depending on your income bracket. This means a short-term gain could be taxed at 37% if you are in the highest bracket, compared to a maximum of 20% for long-term gains. The difference can be substantial on large profits.
How income thresholds determine your rate
Your filing status and total taxable income determine which long-term capital gains rate applies. The IRS groups filers into three categories: single, married filing jointly, and head of household. Each category has its own income thresholds.
| Filing Status | 0% Rate Applies To | 15% Rate Applies To | 20% Rate Applies To |
|---|---|---|---|
| Single | Up to $47,025 | $47,025 to $518,900 | Over $518,900 |
| Married Filing Jointly | Up to $94,050 | $94,050 to $583,750 | Over $583,750 |
| Head of Household | Up to $63,000 | $63,000 to $551,350 | Over $551,350 |
These thresholds are adjusted annually for inflation, so the numbers change each year. When you file your tax return, you add your long-term capital gains to your other income to determine your total taxable income, then find which bracket you fall into. If your total income puts you in the 0% bracket, all your long-term gains are taxed at 0%. If part of your income falls in the 15% bracket and part in the 20% bracket, your gains are taxed at both rates proportionally.
Net Investment Income Tax and additional federal taxes
High-income earners may owe an additional 3.8% tax on investment income called the Net Investment Income Tax. This tax applies if your modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married filing jointly, or $125,000 for married filing separately. The 3.8% is calculated on the lesser of your net investment income or the amount your income exceeds the threshold.
This tax is separate from your regular capital gains tax and is added on top of it. So a high-income earner in the 20% long-term capital gains bracket would pay 20% plus 3.8%, totaling 23.8% in federal tax on long-term gains. This tax was introduced as part of the Affordable Care Act and applies to capital gains, dividends, interest, and other investment income.
State and local capital gains taxes
The federal capital gains tax is only part of what you may owe. Most states also tax capital gains, and some cities impose local taxes on investment income. State capital gains tax rates vary widely. Some states tax capital gains at the same rate as ordinary income, while others have separate rates or exemptions.
A few states do not tax capital gains at all, including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Other states tax capital gains as ordinary income, which can range from under 3% to over 13% depending on the state and your income level. You will owe both federal and state tax on the same gain unless you live in a state with no capital gains tax.
How to calculate your federal capital gains tax
To calculate what you owe, start by finding your total taxable income for the year, including wages, interest, dividends, and any other income. Then add your long-term capital gains to that total. Look up which tax bracket your new total falls into based on your filing status. Multiply your long-term capital gains by the applicable rate (0%, 15%, or 20%). If your income spans multiple brackets, calculate the tax on the portion in each bracket separately and add them together.
For short-term gains, straightforward add them to your ordinary income and tax them at your regular tax bracket rate. If you have both long-term and short-term gains, calculate each separately. You will report all of this on Schedule D of your tax return when you file. If you have losses from investments, you can use those to offset gains and reduce your tax bill.
Frequently Asked Questions
Do I have to hold an investment for exactly one year or more than one year?
You must hold it for more than one year. If you buy a stock on January 15 and sell it on January 15 the next year, it is still considered short-term because you have not held it for more than one year. You need to hold it until at least January 16 of the following year for it to may have access to as long-term.
What if I sell an investment at a loss?
Capital losses can offset capital gains, reducing your tax bill. If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against ordinary income. Any remaining losses carry forward to future years and can be used to offset future gains or ordinary income.
Are dividends taxed the same way as capital gains?
may have access to dividends are taxed at the same rates as long-term capital gains (0%, 15%, or 20%), but non-may have access to dividends are taxed as ordinary income. Most dividends from U.S. corporations and certain foreign corporations are may have access to if you meet a holding period requirement. Check your brokerage statement to see which dividends are may have access to.
Do I owe capital gains tax if I inherit an investment?
No federal capital gains tax is owed on the inheritance itself. However, if you later sell the inherited investment, you may owe capital gains tax on the profit from the sale price at the time you inherited it. This is called a "stepped-up basis" and can significantly reduce or eliminate the tax on inherited investments.
What happens if I do not report capital gains on my tax return?
Your brokerage sends a Form 1099-B to the IRS reporting sales you made during the year. If you do not report the gains on your return, the IRS will likely notice the discrepancy and send you a notice. You will owe the tax plus interest and potentially penalties for underreporting income.