Long-term capital gains have their own tax rates, separate from ordinary income

No, long-term capital gains are not taxed as ordinary income. They use a different set of tax rates that are usually lower than the rates applied to wages, salary, and other ordinary income. The difference matters: depending on your total income, a long-term capital gain might be taxed at 0%, 15%, or 20%, while the same dollar amount of ordinary income could be taxed at 10%, 12%, 22%, or higher.

The IRS treats long-term and short-term capital gains differently because you held the asset for more than one year. That holding period is the dividing line. If you sell something you owned for a year or less, it counts as a short-term capital gain and gets taxed at your ordinary income rate. If you held it longer than a year, it qualifies for the lower long-term rate.

Key Takeaways

  • Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20%, depending on your total income for the year.
  • Short-term capital gains (assets held one year or less) are taxed at the same rates as ordinary income, which can be 10% to 37%.
  • Your total income determines which long-term rate applies to you, not the size of the gain itself.
  • The one-year holding period starts the day after you buy the asset and ends the day you sell it.

The three long-term capital gains tax rates

The IRS sets three brackets for long-term capital gains: 0%, 15%, and 20%. Which one applies to you depends on your taxable income for the year — the income left after you subtract deductions. The income thresholds change each year and differ based on whether you file as single, married filing jointly, head of household, or another status.

For 2024, the 0% rate applies to single filers with taxable income up to $47,025 and married couples filing jointly up to $94,050. The 15% rate covers the middle range, and the 20% rate applies to income above the top threshold. These numbers shift annually, so check the IRS website or a tax guide for the current year's brackets before you file.

The key point: your ordinary income and your capital gains are stacked together to determine your total taxable income, which then determines your capital gains rate. If you earn $50,000 in wages and have a $10,000 long-term capital gain, your total taxable income is $60,000, and that total determines which capital gains rate applies.

How holding period affects your tax bill

The one-year holding period is strict and specific. You must own the asset for more than one year — meaning you hold it for at least 366 days. The holding period starts the day after you purchase it and ends on the day you sell it. If you buy stock on January 15 and sell it on January 15 of the next year, that is exactly one year, which does not may have access to. You need to sell on January 16 or later.

Short-term capital gains — anything you sell within one year — are taxed at your ordinary income rate. If you are in the 24% ordinary income bracket and sell a stock you held for six months at a $5,000 gain, that $5,000 is taxed at 24%, not at the 15% long-term rate. The difference on a $5,000 gain is $450 in federal tax.

This is why the holding period matters so much. Waiting a few months can move you from short-term (taxed as ordinary income) to long-term (taxed at a lower rate). Some investors plan their sales around this threshold to reduce their tax bill.

What counts as a capital gain

A capital gain is the profit you make when you sell an asset for more than you paid for it. Common assets include stocks, bonds, mutual funds, real estate, and cryptocurrency. If you buy 100 shares of a stock for $50 per share ($5,000 total) and sell them for $60 per share ($6,000 total), your capital gain is $1,000.

You also have capital gains when you sell inherited property, collectibles, or business assets. The gain is always the sale price minus what you paid for it (your cost basis). If you inherited property and the value went up after you inherited it, only the increase after inheritance counts as a gain — the value at the time of inheritance becomes your new cost basis.

Not everything you sell creates a capital gain. If you sell your primary home and meet certain conditions (owned it and lived in it for at least two of the last five years), you may not owe tax on up to $250,000 of the gain if you are single, or $500,000 if married filing jointly. This is a specific exclusion that applies only to primary residences.

Capital losses and how they offset gains

If you sell an asset for less than you paid for it, you have a capital loss. Capital losses can reduce your capital gains dollar-for-dollar. If you have $8,000 in long-term capital gains and $3,000 in capital losses, your net capital gain is $5,000, and only that $5,000 is taxed.

If your capital losses exceed your capital gains in a year, you can use up to $3,000 of the excess loss to reduce your ordinary income. If you have $10,000 in losses and $2,000 in gains, you have an $8,000 net loss. You can use $3,000 to reduce your ordinary income that year, and the remaining $5,000 carries forward to future years, where you can use it again.

This is called tax-loss harvesting — selling losing positions to offset gains elsewhere. Some investors use this strategy to manage their tax bill, especially late in the year when they know their total income.

How to report capital gains on your tax return

You report capital gains on Schedule D (Form 1040), which is the IRS form for capital gains and losses. Your brokerage or investment firm sends you a Form 1099-B after the year ends, showing all the sales you made and the proceeds. You use that form to fill out Schedule D.

Schedule D separates short-term and long-term gains and losses. You list each sale, the date you bought it, the date you sold it, your cost basis, the sale price, and the gain or loss. The form then calculates your net short-term and net long-term totals, which flow to your main tax return (Form 1040).

If you use tax software or work with a tax preparer, they usually import the 1099-B data automatically and guide you through the process. The software will explore the correct tax rate to your long-term gains based on your total income for the year.

State and local taxes on capital gains

Federal tax is only part of the picture. Some states also tax capital gains, and a few have special rates for them. California, for example, taxes capital gains as ordinary income at the state level. New York does the same. Other states have no income tax at all, so you owe federal tax only.

A handful of states — including Washington and Oregon — have recently passed capital gains taxes that explore only to long-term gains above a certain threshold. These are newer and still being challenged in court, so the rules may change. Check your state's tax website or speak with a tax preparer to understand what you owe in your state.

Local taxes vary too. Some cities and counties impose income taxes or capital gains taxes on top of state and federal tax. If you live in a high-tax area, the combined rate on your capital gains could be significantly higher than the federal rate alone.

Frequently Asked Questions

Do I owe tax on capital gains if I do not sell the asset?

No. You only owe tax when you sell the asset and realize the gain. If you own stock that has doubled in value but you still hold it, there is no tax due. The tax is triggered by the sale, not by the increase in value. This is why some investors hold appreciated assets for decades without paying tax on the gains.

What if I inherit stock or property — do I owe capital gains tax?

Not on the inherited value itself. When you inherit an asset, your cost basis is reset to its value on the date of the person's death. If you inherit stock worth $50,000 and it was worth $30,000 when the person died, your cost basis is $30,000. If you sell it when ready for $50,000, you have a $20,000 gain. But if you hold it and it grows to $60,000, only the $10,000 increase after inheritance is taxable.

Can I deduct investment losses from my taxes?

Yes, but with limits. You can use capital losses to offset capital gains dollar-for-dollar. If you have excess losses beyond your gains, you can deduct up to $3,000 per year against ordinary income. Any losses beyond that carry forward to future years. This is why some investors sell losing positions before year-end to reduce their tax bill.

Do I have to hold an asset for exactly one year, or is it more than one year?

It is more than one year. The holding period is measured from the day after you buy it to the day you sell it. If you buy on January 15 and sell on January 15 the next year, that is exactly one year and does not may have access to for long-term rates. You must sell on January 16 or later to meet the requirement.

What happens if I sell at a loss — can I use that to reduce my ordinary income?

Yes, but only up to $3,000 per year. If you have a net capital loss (losses exceed gains), you can use up to $3,000 to reduce your ordinary income. Any loss beyond $3,000 carries forward to the next year, where you can use another $3,000, and so on until the loss is fully used.