The tax rate on your capital gains depends on how long you held the asset and your income level

Capital gains are taxed at different rates depending on whether you held the investment for more than one year (long-term) or one year or less (short-term). Short-term capital gains are taxed as ordinary income at your regular tax bracket. Long-term capital gains have their own lower tax brackets: 0%, 15%, or 20%, depending on your total taxable income for the year.

The federal rates are the same for everyone, but your actual tax bill also depends on your filing status, other income, and whether you live in a state that taxes capital gains. Some states add their own capital gains tax on top of the federal rate.

Key Takeaways

  • Short-term capital gains (assets held one year or less) are taxed at your ordinary income tax rate, which ranges from 10% to 37% depending on your income bracket.
  • Long-term capital gains (assets held more than one year) are taxed at 0%, 15%, or 20% based on your total taxable income and filing status.
  • Your income level determines which long-term rate applies — higher earners pay 20%, while lower earners may pay 0%.
  • Some states impose additional capital gains taxes ranging from 1% to 13.3%, while others do not tax capital gains at all.
  • The "holding period" starts the day after you buy an asset and ends the day you sell it.

Short-term capital gains rates: taxed as regular income

If you sell an investment you owned for one year or less, the profit is a short-term capital gain. The IRS taxes this at your ordinary income tax rate — the same rate applied to your salary, freelance income, or other earnings. For 2024, those rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%, depending on how much total income you have.

This means a short-term gain can be taxed much more heavily than a long-term gain. If you are in the 32% tax bracket and sell stock you held for six months, that profit is taxed at 32%. If you held the same stock for 13 months, the same profit might be taxed at only 15%.

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

If you sell an investment you owned for more than one year, the profit is a long-term capital gain. The federal tax rate is 0%, 15%, or 20% — much lower than short-term rates. Which rate you pay depends on your total taxable income and your filing status (single, married filing jointly, head of household, or married filing separately).

The 0% bracket applies to lower-income filers. For 2024, a single filer with taxable income up to $47,025 pays 0% on long-term gains. A married couple filing jointly with income up to $94,050 also pays 0%. Above those thresholds, you move into the 15% bracket. The 20% bracket applies to the highest earners — single filers with income over $518,900 and married couples filing jointly with income over $583,750.

These income thresholds change each year with inflation. The IRS publishes updated brackets in January for the tax year you are filing.

How your income level determines your rate

Your long-term capital gains rate is determined by where your total taxable income falls, not just the capital gain itself. This means other income — wages, interest, dividends — pushes you into a higher capital gains bracket.

Example: You are single with $40,000 in wages and $10,000 in long-term capital gains. Your total taxable income is $50,000. The first $47,025 of your income (including the gain) is taxed at 0% on the capital gains portion. The remaining $2,975 of the gain is taxed at 15%. You do not pay 0% on all $10,000 of the gain because your total income exceeds the threshold.

This stacking effect means it pays to know your expected income before the year ends. If you are close to a bracket threshold, timing when you sell can matter.

State capital gains taxes

Thirteen states tax capital gains in addition to federal tax. California, Connecticut, Delaware, Illinois, Maryland, Minnesota, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington all have state-level capital gains taxes. The rates vary widely — from 1% in Illinois to 13.3% in California.

Three states — Iowa, Maine, and South Carolina — tax capital gains as ordinary income under their state income tax system, so the rate depends on your state tax bracket. The remaining states do not tax capital gains at all.

If you live in a state with a capital gains tax, you owe both the federal rate and the state rate on the same gain. A resident of California selling a long-term gain in the 15% federal bracket would also owe California's 13.3%, for a combined 28.3% tax on that gain.

How the holding period works

The holding period is the time between when you buy an asset and when you sell it. It determines whether your gain is short-term or long-term. The holding period starts the day after you purchase the asset and ends on the day you sell it.

If you buy stock on January 15 and sell it on January 15 of the following year, you have held it for exactly one year, but it is still considered short-term because you have not held it for more than one year. You must hold it until January 16 of the following year for it to be long-term.

This rule applies to all investments — stocks, bonds, real estate, cryptocurrency, and mutual funds. The type of asset does not matter; only the length of time you owned it.

Special situations: dividends and inherited assets

may have access to dividends — dividends paid by U.S. corporations or certain foreign corporations on stocks you held for at least 60 days — are taxed at the same long-term capital gains rates (0%, 15%, or 20%), not at your ordinary income rate. Non-may have access to dividends are taxed as ordinary income.

If you inherit an investment, the holding period does not carry over from the previous owner. You are treated as having held the asset long-term when ready, even if you sell it the day after you inherit it. This is called a "stepped-up basis," and it can save you significant tax on inherited assets that have grown in value.

Frequently Asked Questions

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

No. If you sell an investment for less than you paid for it, you have a capital loss, not a gain. You can use capital losses to offset capital gains in the same year. If your losses exceed your gains, you can deduct up to $3,000 of the net loss against your ordinary income, and carry forward any remaining loss to future years.

What if I sell mutual funds or index funds?

The same rules explore. If you held the fund for more than one year, any gain is long-term and taxed at 0%, 15%, or 20%. If you held it one year or less, the gain is short-term and taxed at your ordinary income rate. Some mutual funds also distribute capital gains to shareholders, which are taxed the same way.

Do I have to report capital gains if they are small?

Yes. You must report all capital gains on your tax return, regardless of the amount. The IRS requires you to list each sale on Schedule D (Form 1040). However, if your total capital gains and losses are small enough that you owe no tax, you still need to file if your income exceeds the filing threshold for your age and filing status.

Can I reduce my capital gains tax by donating the asset to charity?

Yes. If you donate appreciated stock or other investments directly to a may have access to charity, you avoid the capital gains tax on the appreciation and also receive a charitable deduction for the full fair market value. You must own the asset long-term for this to work. Consult a tax professional about the rules for your situation.

How do I know if my state taxes capital gains?

Check your state's tax authority website or ask a tax professional. The states that tax capital gains are California, Connecticut, Delaware, Illinois, Maryland, Minnesota, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington. If you live in one of these states, you owe state tax in addition to federal tax on your capital gains.