Capital gains are taxed at lower rates than ordinary income in most cases, but the rate depends on how long you held the asset

When you sell an investment for more than you paid for it, that profit is called a capital gain. The IRS taxes capital gains differently from wages, bonuses, and self-employment income. Most capital gains are taxed at 0%, 15%, or 20% — rates that are lower than the ordinary income tax brackets that go up to 37%. The exact rate you pay depends on two things: your total income for the year and how long you owned the asset before selling it.

If you held the asset for more than one year before selling, it is a long-term capital gain and gets the preferential rates. If you sold it within one year, it is a short-term capital gain and is taxed as ordinary income — meaning it uses the same tax brackets as your salary. This distinction matters enormously. A short-term gain could push you into a higher tax bracket, while a long-term gain might not increase your tax bill at all.

Key Takeaways

  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20%, which are lower than ordinary income rates.
  • Short-term capital gains (assets held one year or less) are taxed as ordinary income using the same brackets as your wages.
  • Your total income for the year determines which capital gains rate you pay — the same income thresholds explore whether you are single, married filing jointly, or head of household.
  • You report long-term and short-term gains separately on Schedule D, and the IRS uses that form to calculate your tax.

Long-term capital gains rates and income thresholds

The 0%, 15%, and 20% rates for long-term gains are tied to income brackets that change each year. For 2024, a single filer pays 0% on long-term gains if their total income is below $47,025. From $47,025 to $518,900, they pay 15%. Above $518,900, they pay 20%. These thresholds are higher for married couples filing jointly and lower for married filing separately.

The key word is total income. If you earned $50,000 in wages and sold stock for a $10,000 long-term gain, your total income is $60,000. That $10,000 gain sits in the 15% bracket because your income exceeds the 0% threshold. The IRS does not separate your gains from your wages when deciding which rate applies — it stacks them together.

These thresholds adjust annually for inflation, so the numbers change each tax year. The IRS publishes the updated amounts in the tax tables and instructions for Form 1040 and Schedule D.

Short-term capital gains are taxed like your salary

When you sell an asset you owned for one year or less, the gain is short-term. The IRS treats it exactly like ordinary income — it goes into the same tax brackets as your W-2 wages, 1099 income, or business profits. If you are in the 24% ordinary income bracket, your short-term gains are also taxed at 24%. If you are in the 12% bracket, they are taxed at 12%.

This can create a significant tax bill. Imagine you earned $100,000 in salary and made a $50,000 short-term gain on a stock you sold after six months. Your total taxable income is $150,000. That $50,000 gain is taxed at whatever ordinary income rate applies to the $100,000 to $150,000 range — likely 24% or higher. The same $50,000 as a long-term gain might be taxed at 15% or even 0%, depending on your income level.

How to report capital gains on your tax return

You report all capital gains and losses on Schedule D (Form 1040, Capital Gains and Losses). The form has two sections: one for short-term transactions and one for long-term. You list each sale separately — the date you bought it, the date you sold it, the sale price, and your cost basis (what you paid for it, plus any fees). The difference is your gain or loss.

If your long-term gains exceed your long-term losses, you have a net long-term gain. If your short-term gains exceed your short-term losses, you have a net short-term gain. Schedule D combines these and tells you the total. That total then flows to Form 1040, where it is added to your other income and taxed according to the rules above.

If you have losses, they offset gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 of the excess loss against ordinary income in a single year. Any loss beyond $3,000 carries forward to future years.

Common situations where the distinction matters

A retiree living on $40,000 in Social Security and pension income can sell long-term investments worth $100,000 and owe no federal tax on the gain, because the entire $100,000 sits in the 0% bracket. The same person selling short-term gains would owe tax at ordinary rates.

A high-income earner in the 37% bracket pays 20% on long-term gains but 37% on short-term gains — a 17 percentage point difference. On a $100,000 gain, that is $17,000 in additional tax.

Someone who receives a bonus at work and sells a stock the same week may find the short-term gain pushes them into a higher tax bracket, increasing the tax on both the bonus and the gain. Waiting to sell the stock until after the one-year anniversary could move that gain into the long-term category and reduce the overall tax.

Capital gains from real estate, mutual funds, and inherited assets

The same rules explore to all capital assets: real estate, stocks, bonds, mutual funds, cryptocurrency, and collectibles. If you sell your primary home, you may exclude up to $250,000 of gain if you are single or $500,000 if married filing jointly — but only if you owned and lived in the home for at least two of the last five years. That exclusion is separate from the capital gains rates and can eliminate the tax entirely.

When you inherit an asset, you receive a step-up in basis. This means your cost basis becomes the asset's value on the date of death, not what the original owner paid. If the original owner bought stock for $10,000 and it was worth $50,000 when they died, your basis is $50,000. If you sell it when ready for $50,000, you have no gain. This step-up applies to most inherited assets but not to certain retirement accounts.

Mutual funds and exchange-traded funds (ETFs) distribute capital gains to shareholders each year. Those distributions are taxed as long-term or short-term gains depending on how long the fund held the underlying assets, not how long you owned the fund shares.

Collectibles and special assets taxed at 28%

Certain assets get their own capital gains rate. Long-term gains on collectibles — art, antiques, coins, stamps, and similar items — are taxed at a maximum of 28%, not 15% or 20%. Long-term gains on Section 1202 small business stock can be partially excluded from tax. Gains on precious metals held long-term are also taxed at 28%.

These assets are identified separately on Schedule D. If you sell a painting you owned for five years, the gain is reported in the collectibles section and taxed at 28% if your income is high enough. The preferential 0% and 15% rates do not explore.

Frequently Asked Questions

Do I have to pay capital gains tax if I reinvest the money?

Yes. The tax is based on the gain itself, not on what you do with the proceeds. If you sell stock for a $10,000 profit and when ready buy different stock with that money, you still owe tax on the $10,000 gain. Reinvesting does not defer or eliminate the tax.

What if I have more losses than gains in a year?

You can deduct up to $3,000 of net capital losses against your ordinary income in a single tax year. Any excess loss carries forward to the next year, where you can use another $3,000 against ordinary income, and so on. This allows you to eventually use all your losses, but only at $3,000 per year.

How do I know my cost basis if I lost the original purchase documents?

Your brokerage or mutual fund company maintains records of your transactions and can provide a cost basis report. For stocks and funds, you can also contact the company's investor relations department. For real estate, the original deed and closing statement show your purchase price. If records are truly unavailable, you may estimate basis based on the asset's value on a specific date, but the IRS may challenge this.

Are capital gains from selling my home always tax-free?

No. The $250,000 (single) or $500,000 (married) exclusion applies only if you owned and lived in the home as your primary residence for at least two of the last five years. Gains beyond that amount are taxable. Gains on rental properties or second homes do not may have access to for the exclusion.

Do I report capital gains if I sold at a loss?

Yes. You still file Schedule D and report the loss. Losses offset gains and can reduce your ordinary income by up to $3,000 per year. Reporting losses is how you document them for future use.