The basics: what rate you pay depends on how long you held the asset

Capital gains tax rates are the percentages the federal government takes from your profit when you sell an investment. The rate you pay depends almost entirely on one thing: how long you owned the asset before you sold it. If you held it for more than one year, you pay the long-term capital gains rate. If you held it for one year or less, you pay the short-term capital gains rate, which is the same as your ordinary income tax rate.

Long-term rates are lower than short-term rates, which is why the holding period matters so much. The IRS treats long-term gains more favorably because Congress wants to encourage people to invest for the long run rather than trade constantly.

Your income level also affects which rate you pay. The federal government has three long-term capital gains brackets, and which one applies to you depends on your total taxable income for the year. Short-term gains, by contrast, use the same brackets as your regular salary or wages.

Key Takeaways

  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20% depending on your income level, while short-term gains are taxed at your ordinary income tax rate.
  • Your income level determines which bracket you fall into, so a higher salary can push you into a higher capital gains bracket even if your investment profit stays the same.
  • State and local taxes add to the federal rate, and some states tax capital gains as ordinary income while others have no capital gains tax at all.
  • The Net Investment Income Tax of 3.8% applies to high earners and is calculated separately from capital gains tax brackets.
  • You report capital gains on Schedule D of your tax return, and the IRS requires you to track your purchase date and sale price for every transaction.

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

If you held an investment for more than one year before selling it, you pay one of three federal long-term capital gains rates: 0%, 15%, or 20%. Which rate applies depends on your taxable income for that year. The IRS updates the income thresholds every year to account for inflation, so the exact dollar amounts change annually.

The 0% rate applies to the lowest earners. For 2024, this includes single filers with taxable income up to roughly $47,000 and married couples filing jointly up to roughly $94,000. If your income is below these thresholds, you owe no federal tax on long-term capital gains, though you still must report them on your tax return.

The 15% rate is the middle bracket and covers most people who invest. It applies to income above the 0% threshold up to a higher limit. For 2024, this is roughly $518,000 for single filers and $583,000 for married couples filing jointly. Most investors pay this rate.

The 20% rate applies to high earners above those thresholds. This is the highest federal long-term capital gains rate. These thresholds vary by filing status—single, married filing jointly, married filing separately, and head of household all have different income cutoffs.

Short-term capital gains: taxed as ordinary income

If you held an investment for one year or less before selling it, any profit is a short-term capital gain. The federal government taxes this at your ordinary income tax rate, which ranges from 10% to 37% depending on your total income and filing status. This is significantly higher than long-term rates for most people.

Short-term gains use the same tax brackets as your salary, bonus, or other earned income. This means if you earn $80,000 per year and realize a $10,000 short-term capital gain, the gain is taxed at whatever bracket your $90,000 total income falls into. The gain can push you into a higher bracket entirely.

The IRS tracks holding period by calendar days. If you buy a stock on January 15 and sell it on January 15 of the following year, it qualifies as long-term. If you sell on January 14, it is short-term. This is why some investors wait a few extra days before selling to cross into the long-term category.

How your income level determines your bracket

Your taxable income for the year determines which capital gains bracket you fall into. Taxable income includes your salary, wages, interest, dividends, and other income, minus deductions and exemptions. When you add a capital gain to this total, it can push you into a higher bracket.

For example, suppose you are a single filer with $45,000 in salary and you sell an investment for a $5,000 long-term gain. Your taxable income is now $50,000. You are still in the 0% long-term capital gains bracket because $50,000 is below the threshold. But if you had a $10,000 gain instead, your taxable income would be $55,000, which exceeds the threshold, so part of your gain would be taxed at 15%.

This is called bracket creep. A large capital gain can push you from one bracket into another, meaning different portions of your gain are taxed at different rates. Understanding where your income sits relative to the thresholds helps you plan when to sell investments or whether to spread sales across multiple years.

State and local capital gains taxes

The federal rates are only part of your total tax bill. Most states also tax capital gains, and some cities do as well. State rates vary widely: some states tax capital gains as ordinary income using the same brackets as federal tax, while others have a flat rate or no capital gains tax at all.

A few states—including Washington, Tennessee, and Florida—have no state income tax and therefore no capital gains tax. Others, like California, tax capital gains at the same rate as ordinary income, which can be as high as 13.3%. Still others use a separate capital gains tax rate or bracket.

Your total tax bill is the sum of federal, state, and local taxes. If you live in a high-tax state and realize a large long-term gain, your combined rate could be 35% or higher. This is why some investors consider the state tax implications when deciding whether and when to sell an investment.

The Net Investment Income Tax for high earners

High-income earners pay an additional 3.8% tax called the Net Investment Income Tax (NIIT). This tax applies to capital gains, dividends, interest, and other investment income for individuals whose modified adjusted gross income exceeds certain thresholds. For 2024, the threshold is roughly $200,000 for single filers and $250,000 for married couples filing jointly.

The NIIT is calculated separately from your regular capital gains tax. If you are subject to it, you owe 3.8% on top of your federal and state capital gains rates. This means a high earner in a high-tax state could pay 20% federal + state rate + 3.8% NIIT, totaling nearly 44% on a long-term capital gain.

Not all investment income counts toward the NIIT threshold. Certain types of income, like gains from selling your primary residence (up to the exclusion limit) or income from an active business, may be excluded. You report the NIIT on Form 8960 when you file your tax return.

How to report capital gains on your tax return

You report capital gains using Schedule D, which is part of Form 1040. On Schedule D, you list each sale separately: the asset sold, the date you bought it, the date you sold it, your cost basis (what you paid), the sale price, and your gain or loss. The IRS uses the dates to determine whether the gain is long-term or short-term.

If you have many transactions, you may also file Form 8949, which feeds into Schedule D. Your brokerage or investment platform sends you a Form 1099-B showing all your sales for the year, but you are responsible for providing the correct cost basis and holding period. If your records do not match the 1099-B, the IRS will notice.

Keeping good records is essential. Save your purchase confirmations, sale confirmations, and any statements showing the dates and prices. If you inherited an investment, the cost basis is "stepped up" to the value on the date of death, which can significantly reduce your tax bill when you eventually sell. Document this as well.

Frequently Asked Questions

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

You avoid paying capital gains tax only if you never sell. Once you sell, you owe tax on the gain. However, if you hold until death, your heirs receive a "stepped-up basis," meaning the cost basis resets to the value on the date of death. They can then sell when ready with little or no tax. This is a major tax advantage of holding long-term.

What if I have a capital loss instead of a gain?

Capital losses can offset capital gains dollar-for-dollar. If you have $10,000 in gains and $6,000 in losses, you report a net gain of $4,000. If losses exceed gains, you can deduct up to $3,000 of the excess loss against ordinary income in that year. Any remaining losses carry forward to future years. This is why some investors "harvest" losses strategically to reduce their tax bill.

Do I pay capital gains tax on mutual funds or index funds?

Yes, if you sell shares for a profit. You also may owe tax on capital gains distributions the fund makes to you during the year, even if you did not sell. These distributions are taxed as long-term or short-term depending on how long the fund held the underlying assets. Check your fund statements for these distributions.

How do I know my cost basis if I bought stock years ago?

Your brokerage should have records going back several years. Log into your account and look for historical statements or a cost basis report. If your brokerage no longer has records, contact them directly—they are required to keep records for a reasonable time. If records are truly unavailable, you may need to reconstruct them using old confirmations or tax returns.

Does the holding period reset if I sell and buy the same stock again?

Yes. Each purchase starts a new holding period. If you sell a stock after eight months and buy it again the next day, the new purchase begins a fresh one-year clock. This is why the "wash sale" rule exists—it prevents you from selling at a loss and when ready buying back to reset the holding period while claiming the loss.