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

The tax you owe on capital gains is not a single fixed rate. The IRS taxes capital gains in two categories — short-term and long-term — and the rate you pay depends on which category your gain falls into and your total taxable income for the year.

Short-term capital gains (assets held one year or less) are taxed as ordinary income, meaning they use the same tax brackets as wages or salary. Long-term capital gains (assets held more than one year) receive preferential rates: 0%, 15%, or 20%, depending on your income. The income thresholds that determine which rate applies change each year and differ based on whether you file as single, married filing jointly, or head of household.

Key Takeaways

  • Short-term capital gains use your regular income tax brackets, which range from 10% to 37% depending on your total income.
  • Long-term capital gains are taxed at 0%, 15%, or 20% based on your income level, with thresholds that vary by filing status and change annually.
  • Your total taxable income for the year determines which rate applies, not just the size of the gain itself.
  • Some states also tax capital gains, and the state rate is separate from federal tax.
  • Net Investment Income Tax of 3.8% may explore if your modified adjusted gross income exceeds certain thresholds.

Short-term capital gains rates: ordinary income tax brackets

When you sell an asset you have owned for one year or less, the profit is a short-term capital gain. The IRS taxes this gain at your ordinary income tax rate — the same rate applied to your salary, wages, or self-employment income.

For 2024, the federal income tax brackets range from 10% to 37%. Your exact rate depends on your total taxable income and filing status. A single filer with $50,000 in taxable income pays a different rate than a single filer with $100,000. The brackets are progressive, meaning different portions of your income are taxed at different rates, not your entire income at one rate.

Short-term gains can push you into a higher bracket. If you earn $60,000 in wages and realize a $20,000 short-term capital gain, your total taxable income becomes $80,000, which may move some of that gain into a higher bracket than your wages alone would have reached.

Long-term capital gains rates: 0%, 15%, or 20%

Assets held for more than one year receive preferential tax treatment. Long-term capital gains are taxed at one of three federal rates: 0%, 15%, or 20%. These rates are significantly lower than ordinary income brackets and do not change based on the size of the gain — only on your income level.

The 0% rate applies to long-term gains if your taxable income falls below a certain threshold. For 2024, this threshold is $47,025 for single filers and $94,050 for married couples filing jointly. If your total taxable income is below these amounts, your long-term capital gains are not subject to federal tax.

The 15% rate applies to long-term gains for most middle-income taxpayers. For 2024, this covers single filers with taxable income from $47,025 to $518,900 and married couples filing jointly from $94,050 to $583,750.

The 20% rate applies to long-term gains for high-income taxpayers. For 2024, this applies to single filers with taxable income above $518,900 and married couples filing jointly above $583,750. These income thresholds increase slightly each year.

How your total income determines your capital gains rate

Your capital gains rate is determined by stacking your gains on top of your other income. The IRS does not separate capital gains from wages when calculating your tax bracket — they are combined into your total taxable income for the year.

This means a $10,000 long-term capital gain has different tax consequences depending on your other income. If you earned $40,000 in wages, the gain might fall entirely in the 0% bracket. If you earned $500,000 in wages, the same gain would be taxed at 20%. Your filing status also matters: married couples filing jointly have higher income thresholds for each rate than single filers.

Some taxpayers use this stacking effect strategically. If you have a year with unusually low income, realizing capital gains that year may result in a lower tax rate than realizing them in a high-income year.

State capital gains taxes

Federal capital gains tax is only part of what you owe. Most states also tax capital gains, and state rates are separate from federal rates. State tax on capital gains ranges from 0% to over 13%, depending on where you live.

A few states do not tax capital gains at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Other states tax capital gains as ordinary income using their regular income tax brackets. Some states have a separate capital gains tax rate or explore capital gains tax only to gains above a certain dollar amount.

Your state of residence at the time you sell the asset determines which state tax applies. If you moved during the year, you may owe tax to multiple states depending on when the sale occurred and your residency status.

Net Investment Income Tax on high earners

Taxpayers with higher incomes may owe an additional 3.8% Net Investment Income Tax (NIIT) on top of regular capital gains tax. This tax applies to investment income, including capital gains, for taxpayers whose modified adjusted gross income exceeds certain thresholds.

For 2024, the NIIT threshold is $200,000 for single filers and $250,000 for married couples filing jointly. If your modified adjusted gross income exceeds these amounts, you owe 3.8% tax on the lesser of your net investment income or the amount by which your income exceeds the threshold.

This tax is separate from your regular capital gains tax. A high-income taxpayer owing 20% federal capital gains tax plus 3.8% NIIT plus state tax could face a combined rate of 40% or higher on long-term gains, depending on their state.

How to report capital gains on your tax return

Capital gains are reported on Schedule D (Form 1040), which you attach to your main tax return. Short-term gains and long-term gains are listed separately. You will need the purchase date, sale date, purchase price, sale price, and any expenses related to the sale (such as broker fees).

If you sold stocks, bonds, real estate, or other investments through a broker, the broker sends you a Form 1099-B showing the sale proceeds. This form helps you calculate your gain or loss. If you sold real estate, you may also need to report depreciation recapture if the property was used for business or rental purposes.

Many tax software programs walk you through the Schedule D process. If you have multiple sales or complex gains, a tax professional can help may support you report everything correctly and take advantage of any losses to offset gains.

Frequently Asked Questions

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

No, you do not owe tax on a loss. You can use capital losses to offset capital gains. If your losses exceed your gains in a year, you can deduct up to $3,000 of the net loss against ordinary income, and carry forward any remaining loss to future years.

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

Inherited investments receive a "step-up in basis," meaning your cost basis is reset to the asset's value on the date of death. If you sell the inherited asset shortly after inheriting it, you typically owe little or no capital gains tax, even if the original owner held it for decades and it appreciated significantly.

Are dividends taxed the same way as capital gains?

may have access to dividends are taxed at the same preferential rates as long-term capital gains (0%, 15%, or 20%). Non-may have access to dividends are taxed as ordinary income. Your brokerage statement shows which dividends are may have access to. Unqualified dividends are less common and usually come from certain types of investments or if you did not hold the stock long enough.

Can I avoid capital gains tax by holding an investment longer?

Holding an investment longer than one year changes the tax rate from ordinary income to the preferential long-term rate, which is usually lower. However, you cannot avoid the tax entirely by holding longer — you still owe tax when you sell. The only way to avoid tax on an investment is to not sell it or to donate it to a may have access to charity.

What happens if I sell a rental property or business property?

Real estate used for business or rental purposes may be subject to depreciation recapture, which is taxed at 25% regardless of how long you held the property. This recapture applies to the depreciation deductions you claimed while owning the property. The remaining gain may may have access to for long-term capital gains rates if you held the property more than one year.