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

The amount of capital gains tax you owe is determined by two things: the tax rate that applies to you and how long you owned the asset before selling it. The federal government taxes long-term gains (assets held over one year) at lower rates than short-term gains (assets held one year or less). Your tax rate also depends on your total income for the year, not just the gain itself.

For 2024, federal long-term capital gains rates are 0%, 15%, or 20%. Short-term gains are taxed as ordinary income, which means rates range from 10% to 37% depending on your tax bracket. Most people pay 15% on long-term gains. Your state may also charge capital gains tax on top of the federal amount, and that varies widely by location.

Key Takeaways

  • Long-term capital gains (held over one year) are taxed at 0%, 15%, or 20% federally, while short-term gains use your ordinary income tax rate, which can be as high as 37%.
  • Your capital gains tax rate depends on your total taxable income for the year, not just the size of the gain.
  • Most people in the middle income range pay 15% federal tax on long-term gains.
  • Your state may add its own capital gains tax, ranging from 0% to over 13% depending on where you live.
  • You report capital gains on Schedule D of your tax return and pay tax only when you actually sell the asset, not when it increases in value.

How federal long-term capital gains rates work

Long-term capital gains are taxed at three federal rates: 0%, 15%, or 20%. Which rate you pay depends on your filing status and your taxable income for the year. The IRS adjusts these income thresholds each year for inflation.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025, married couples filing jointly up to $94,050, and heads of household up to $62,975. The 15% rate applies to income above those thresholds up to $518,900 (single), $583,750 (married filing jointly), or $551,350 (head of household). Anything above those upper limits is taxed at 20%. These numbers change annually, so check the IRS website or your tax software for the current year's thresholds.

How short-term capital gains are taxed differently

Short-term capital gains—profits from selling assets you owned for one year or less—are taxed as ordinary income. This means they use your regular income tax brackets, which range from 10% to 37% depending on how much total income you earned that year. For most people, this results in a much higher tax bill than long-term gains on the same dollar amount.

For example, if you are in the 24% tax bracket and sell a stock you held for six months at a $5,000 gain, you owe $1,200 in federal tax on that gain. If you had held the same stock for over a year, you would likely owe only $750 (at the 15% long-term rate), assuming your income level qualifies you for that rate. The difference between short-term and long-term treatment can be substantial.

State capital gains taxes vary by location

Some states do not tax capital gains at all. Others add a state capital gains tax on top of the federal tax. A few states tax capital gains as ordinary income, meaning they explore their regular income tax rates. The amount you owe depends entirely on where you live or where the asset is located.

States with no capital gains tax include Florida, Texas, Washington, and Wyoming. States with dedicated capital gains taxes include California (13.3%), New York (varies by income, up to 10.9%), and Oregon (up to 9.9%). Some states only tax capital gains above a certain threshold—for instance, Washington taxes long-term capital gains over $250,000 at 7%. Check your state's tax authority website or speak with a tax professional to learn what applies to you.

How to calculate your capital gains tax

To calculate what you owe, start with the sale price of the asset minus what you paid for it (including any fees or commissions). That number is your gain. Next, determine whether it is short-term or long-term based on your holding period. Then find your applicable tax rate using the income thresholds for your filing status and the current year.

Multiply your gain by that rate to get your federal tax. Then add your state capital gains tax if your state has one. For example: you sell a stock for $15,000 that you bought for $10,000 (a $5,000 gain). You held it for 18 months, so it is long-term. You are a single filer with $60,000 in taxable income. Your long-term rate is 15% (because $60,000 falls in the 15% bracket for 2024). Your federal tax is $750. If you live in a state with no capital gains tax, that is your total. If you live in California, you would also owe state tax on that $5,000 gain.

What happens when you have losses

Capital losses—money you lose when you sell an asset for less than you paid—can reduce your capital gains tax. You can use losses to offset gains dollar-for-dollar. If your losses exceed your gains in a year, you can deduct up to $3,000 of the excess loss against your ordinary income. Any remaining loss carries forward to future years.

For example, if you have $8,000 in long-term gains and $5,000 in long-term losses in the same year, your net gain is $3,000, and you pay tax only on that amount. If you have $2,000 in gains and $7,000 in losses, you can deduct $3,000 of the loss against other income this year and carry the remaining $2,000 loss forward to next year. This is why some investors track their sales carefully and may sell losing positions to offset gains.

How to report capital gains on your tax return

You report capital gains and losses on Schedule D (Form 1040), which you file along with your main tax return. You list each transaction separately: the date you bought the asset, the date you sold it, your cost basis (what you paid), the sale price, and whether it was short-term or long-term. Your tax software or a tax professional can help you organize this information.

Your broker or investment company sends you a Form 1099-B after the year ends, listing all your sales. You use this form to fill out Schedule D. If you have many transactions, you may attach a separate statement. The IRS matches your reported gains against the 1099-B your broker filed, so accuracy matters. If you made a mistake, you can file an amended return (Form 1040-X) within three years.

Frequently Asked Questions

Do I owe capital gains tax if I have not sold the asset yet?

No. You owe capital gains tax only when you actually sell the asset and realize the gain. If a stock you own doubles in value but you do not sell it, you owe no tax on that increase. The tax is triggered by the sale, not by the increase in value itself.

What if I inherited an asset—do I owe capital gains tax on it?

Inherited assets receive a "step-up in basis," meaning your cost basis is the asset's value on the date of death, not what the previous owner paid. If you sell it shortly after inheriting it, you typically owe little or no capital gains tax. If you hold it and it increases in value, you would owe tax on the gain from the date of inheritance forward.

Can I reduce my capital gains tax by donating the asset to charity instead of selling it?

Yes. If you donate appreciated securities directly to a may have access to charity, you avoid the capital gains tax entirely and can deduct the full fair market value of the asset as a charitable contribution. This is often more tax-efficient than selling and donating the proceeds. Consult a tax professional to make sure the charity qualifies.

How do I know if my state taxes capital gains?

Check your state's department of revenue or tax authority website, or ask a tax professional. Some states have no capital gains tax, some tax it as ordinary income, and some have a separate capital gains tax with its own rates and thresholds. The rules vary significantly by state and change over time.

What is the difference between cost basis and sale price?

Cost basis is what you paid for the asset, including any fees or commissions. Sale price is what you received when you sold it. The difference between them is your capital gain or loss. Keeping good records of your cost basis is essential for calculating your tax correctly.