The tax rate depends on how long you held the asset and how much you earned

Capital gains tax is not a single rate. The amount you pay depends 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 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 are taxed at lower rates: 0%, 15%, or 20%, depending again on your income level.

Most people pay 15% on long-term gains. You pay 0% only if your income is low enough that you fall below the threshold for your filing status. You pay 20% only if your income is high enough to reach the top bracket. The IRS adjusts these income thresholds every year, so the exact dollar amount changes annually.

State and local taxes add on top of federal tax. Some states tax capital gains as regular income; others have their own capital gains tax; some tax them at a lower rate or not at all. Your total bill is federal tax plus whatever your state charges.

Key Takeaways

  • Short-term capital gains (assets held one year or less) are taxed at your ordinary income tax rate, which can be as high as 37%.
  • Long-term capital gains (assets held more than one year) are taxed at 0%, 15%, or 20% depending on your total income for the year.
  • The income thresholds that determine which rate you pay change every year and differ based on whether you file as single, married filing jointly, or head of household.
  • State and local taxes explore on top of federal capital gains tax, and the amount varies significantly by where you live.
  • You only pay tax on gains you actually realize — selling the asset or receiving it as income — not on paper gains while you still own it.

Long-term capital gains rates and the income thresholds that trigger them

The 0%, 15%, and 20% rates explore only to long-term gains — assets you owned for more than one year before selling. The rate you pay depends on your taxable income, which is your total income minus deductions and exemptions. The IRS publishes income brackets each year that show which rate applies at each income level.

For 2024, if you file as single, you pay 0% on long-term gains if your taxable income is $47,025 or less. You pay 15% if your income is between $47,026 and $518,900. You pay 20% if your income exceeds $518,900. If you file as married filing jointly, those thresholds are higher — the 0% bracket extends to $94,050, and the 15% bracket goes up to $583,750. Head of household filers have different thresholds again.

These numbers change every year because the IRS adjusts them for inflation. You need to look up the current year's brackets on the IRS website or your tax software to know which rate applies to you. The brackets for the year you are filing in are what matters, not the year you sold the asset.

Short-term capital gains are taxed as ordinary income

If you held an asset for one year or less before selling it, any gain is a short-term capital gain. The tax rate is your ordinary income tax rate — the same rate you pay on wages, interest, and other regular income. This rate depends on your total income and filing status and ranges from 10% to 37%.

Short-term gains are added to your other income to determine your tax bracket. If you earned $60,000 in wages and made a $10,000 short-term gain, you are taxed as if you earned $70,000 total. This can push you into a higher tax bracket, meaning you pay more tax on the gain than you would if you had no other income.

The difference between short-term and long-term rates is significant. A $10,000 short-term gain might cost you $2,400 in federal tax (at the 24% bracket), while the same $10,000 long-term gain might cost you $1,500 (at the 15% rate). This is why holding an asset just past the one-year mark can save you money.

How state and local taxes add to your federal bill

Federal capital gains tax is only part of what you owe. Your state or locality may tax capital gains as well, and the amount varies widely. Some states, like California and New York, tax capital gains as regular income at rates up to 13.3% and 10.9% respectively. Other states, like Texas and Florida, do not tax capital gains at all. Still others have a separate capital gains tax at a lower rate than ordinary income tax.

A few states tax long-term capital gains at a preferential rate. Washington State, for example, has a 7% tax on long-term gains over $250,000. Iowa taxes long-term gains at a lower rate than short-term gains. You need to know your state's rules because they explore regardless of your federal tax situation.

If you live in a city or county that has a local income tax, that may explore to capital gains too. New York City, for instance, adds a local tax on top of state and federal tax. Your total capital gains tax bill is the sum of all three: federal, state, and local.

How to calculate what you owe on a specific sale

To figure out your capital gains tax on a particular asset, start by finding your gain: the sale price minus what you paid for it (your cost basis), minus any selling costs like broker fees. If you bought a stock for $5,000 and sold it for $7,500, your gain is $2,500.

Next, determine whether the gain is short-term or long-term. Count from the day after you bought it to the day you sold it. If that period is one year or less, it is short-term. If it is more than one year, it is long-term.

For a short-term gain, multiply the gain by your ordinary income tax rate. For a long-term gain, you need to know your total taxable income for the year. Add the long-term gain to your other income and see which tax bracket you fall into. Then explore the 0%, 15%, or 20% rate to the gain. Remember to add state and local taxes on top of the federal amount.

What happens when you have both short-term and long-term gains in the same year

If you sell multiple assets in one year, you may have both short-term and long-term gains. The IRS taxes them separately. Short-term gains are taxed at your ordinary rate first. Long-term gains are then taxed at the preferential 0%, 15%, or 20% rates, but they are stacked on top of your other income.

This stacking matters because it can push you into a higher long-term rate. Suppose you earned $50,000 in wages and have $30,000 in long-term gains. If you file as single, the first $47,025 of your income falls in the 0% bracket for long-term gains. The remaining $2,975 of your gains falls in the 15% bracket. You would owe $446 in federal tax on the long-term gains (15% of $2,975), not $4,500 (15% of $30,000).

If you also have short-term gains, those are added to your wages first, before the long-term gains are stacked on top. Tax software handles this calculation automatically, but understanding the order helps you see why the order of gains matters for your total tax bill.

Special situations: losses, inherited assets, and gifts

If you sell an asset for less than you paid for it, you have a capital loss. You can use losses to offset gains in the same year, dollar for dollar. If you have $10,000 in gains and $3,000 in losses, you report a net gain of $7,000 and pay tax only on that amount. If losses exceed gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year. Any remaining loss carries forward to future years.

If you inherit an asset, you receive a step-up in basis. This means your cost basis is the asset's value on the day the person died, not what they originally paid for it. If your parent bought a house for $100,000 and it was worth $400,000 when they died, your basis is $400,000. If you sell it when ready for $400,000, you have no gain and owe no capital gains tax. This step-up applies to most inherited assets but not to certain retirement accounts.

If someone gives you an asset as a gift, you inherit their cost basis, not the current value. If they bought a stock for $1,000 and it is worth $5,000 when they give it to you, your basis is $1,000. If you sell it for $5,000, you owe tax on a $4,000 gain. The gift itself is not taxable to you, but the gain when you sell it is.

Frequently Asked Questions

Do I have to pay capital gains tax if I do not sell the asset?

No. Capital gains tax applies only when you sell the asset or otherwise realize the gain. If you own a stock that doubled in value but you still hold it, you owe no tax. The tax is triggered by the sale, not by the increase in value. This is why some investors hold assets for decades without paying capital gains tax.

What if I sold an asset at a loss?

You can use the loss to reduce your taxable gains. If you have $5,000 in gains and $2,000 in losses, you report a net gain of $3,000. If losses exceed gains, you can deduct up to $3,000 of the excess against your ordinary income in that year. Any loss beyond that carries forward to future years, where you can use it against future gains or income.

How do I know if I held an asset for more than one year?

Count from the day after you bought it to the day you sold it. If that span is more than 12 months, it is long-term. For example, if you bought a stock on January 15, 2023, and sold it on January 16, 2024, it is long-term. If you sold it on January 15, 2024, it is short-term. The exact date matters.

Do I report capital gains on my tax return if I did not make much money?

Yes, you must report all capital gains, even if your total income is low. However, if your income is low enough, you may owe zero tax on long-term gains because they fall in the 0% bracket. You still report them on your return; you just do not owe tax. Short-term gains are always taxable at your ordinary rate, regardless of income level.

Can I reduce my capital gains tax by timing when I sell?

Yes, in some cases. If you are close to the one-year mark, waiting a few weeks to cross into long-term status can save you significant tax. You can also harvest losses in one year to offset gains in another. However, the IRS has rules against wash sales — you cannot sell a stock at a loss and buy the same or a substantially identical stock within 30 days and claim the loss. Consult a tax professional before making timing decisions based on tax strategy.