Capital gains tax is a tax imposed on the profit earned from the sale of a capital asset. Capital assets can include real estate, stocks, bonds, or even rare collectible items purchased for investment purposes. In this article, we will provide an overview of capital gains tax and the 2024-2025 capital gains tax rates. We will also discuss the differences between short-term and long-term capital gains and how these distinctions can significantly impact your tax liability.
Key takeaways on capital gains tax
- Capital gains tax is a tax on the profit made from selling an asset that has increased in value.
- Short-term capital gains are returns on assets held for one year or less, while long-term gains apply to gains on assets held for more than a year. Long-term capital gains are typically taxed at a lower rate.
- Tax rates vary based on income level and the type of gain, with specific brackets set for both years.
- A capital loss occurs when an asset sells for less than its purchase price. When you file your tax return a capital gains loss can offset your gains, potentially reducing overall tax liability.
What is capital gains tax?
Capital gains tax is a tax on profits that you earn from the sale of a capital asset. A capital asset describes everything you own for personal use (not business) or investment purposes. Stocks and bonds, land, your house and car, even your furniture are all examples of capital assets. If you sell your asset for more than you paid for it, the difference is the profit, or a capital gain. If you lose money on the sale, it is called a capital loss.
If you have capital gains and losses over the course of the year, you’ll need to determine your “net capital gain” when you file your taxes. This is very simply the difference between your gains and your losses. If your losses are greater than your gains, that difference, your net capital loss, is deductible up to $3,000, depending on your filing status.
What is the difference between short-term and long-term capital tax?
There are two types of capital gains determined by the holding period: short-term or long-term. The holding period determines if your capital gain or loss is considered short-term or long-term. It is the amount of time the asset is held in your possession prior to selling. If you own the property for less than a year (365 days) it is considered a short-term capital gain or loss. Long-term capital gains (or losses) are ones you own for more than one year prior to selling.
Note: When calculating the holding period, generally, you will not include the day of purchase. However, you will include the day of the sale. This timeframe is significant because short-term and long-term gains are taxed at different tax rates.
Short-term vs. long-term capital gains tax
The primary difference between short-term and long-term capital gains is the rate at which they are taxed. Short-term capital gains are taxed using tax brackets for ordinary income. Long-term gains, on the other hand, are not taxed as income. The tax rates on long-term capital gains are 0%, 15%, or 20%. The rate of taxation is determined by the income threshold.
Capital gains tax rates
Capital gains taxes differ depending on how long you hold your investments. Longer-term investments, held for over a year, are taxed at lower rates to encourage market stability.
Short-term gains from assets held for a year or less incur higher taxes to discourage rapid trading. Short-term capital gains use the same income thresholds as ordinary income, while long-term capital gains use a different tax table:
Short-term capital gains tax rates for 2024 (returns filed in 2025)
In 2024, short-term capital gains are taxed at the same rate as ordinary income, which align with the income brackets set for the year. Here’s an overview of the current brackets for 2024:
Long-term capital gains tax rates for 2024 (returns filed in 2025)
| Filing status | 0% | 15% | 20% |
| Single | $0 to $47,025 | $47,026 to $518,900 | $518,901 or more |
| Head of Household | $0 to $63,000 | $63,001 to $551,350 | $551,351 or more |
| Married Filing Jointly | $0 to $94,050 | $94,051 to $583,750 | $583,751 or more |
| Married Filing Separately | $0 to $47,025 | $47,026 to $291,850 | $291,851 or more |
Short-term capital gains tax rates for 2023 (returns filed in 2024)
In 2023, short-term capital gains are taxed at ordinary income tax rates, which vary based on income levels. For single filers, the 2023 income thresholds are as follows:
Long-term capital gains tax rates for 2023 (returns filed in 2024)
| Filing status | 0% | 15% | 20% |
| Single | $0 to $44,625 | $44,626 to $492,300 | $492,301 or more |
| Head of Household | $0 to $59,750 | $59,751 to $523,050 | $523,051 or more |
| Married Filing Jointly | $0 to $89,250 | $89,251 to $553,850 | $553,851 or more |
| Married Filing Separately | $0 to $44,625 | $44,626 to $276,900 | $276,901 or more |
How to calculate capital gains
Capital gains are the profits you make from selling an asset for more than you paid. Here’s a straightforward approach to calculating your capital gains accurately.
Step 1: Determine your cost basis
The basis is the original cost of the asset, including purchase price, commissions, and any improvements made to the asset. For example, if you bought a stock for $1,000 and paid a $100 commission, your basis would be $1,100.
Step 2: Find the sell price
The sell price is the amount you sold the asset for minus any selling expenses. For instance, if you sold the stock for $1,500 and incurred a $150 commission, the sell price would be $1,350.
Step 3: Calculate your capital gain or loss
Your capital gain or loss is the difference between your cost basis and sell price. Calculate that amount by subtracting your basis from the selling. For example, if your cost basis is $1,100 and your sell price is $1,350, your calculation will look like this:
$1,350 (sell price) – $1,100 (cost basis)
= $250 (capital gain/loss)
In this example, your capital gain is $250. If your calculation results in a negative number, you have a capital loss.
When do you pay capital gains tax?
The IRS typically requires taxpayers to pay capital gains taxes in the year they sell, trade, or dispose of assets. Your capital gains tax liability is calculated on your federal tax return and is due by the tax deadline, which usually falls on April 15th.
Exceptions to capital gains tax
Some of your assets may be partially or fully exempt from capital gains taxes. For example:
- If you sell your primary residence, you may be eligible for an exemption that could reduce your capital gain by up to $250,000 (or up to $500,000 for taxpayers who file jointly).
- If you have collectible items whose value has increased more than their original purchase price due to their rarity, historical significance, or other unique qualities, your capital gains tax may be limited to a max of 28%.
- If you inherit an asset like real estate, stocks, or other investments the basis (or original value) of the property is adjusted to the market value at the time of the previous owner’s death. This adjustment can significantly reduce the potential capital gains if you sell an inherited asset, resulting in a reduced or eliminated capital gains tax.
How to reduce capital gains tax
It is always wise to consider methods for reducing your tax liability. Fortunately, taxpayers can use several strategies to reduce their capital gains and tax liability. Tips like reinvesting income into tax-free accounts or holding onto investments longer for a more desirable tax rate can help you save on your tax return.
- Save for retirement – Contributing to a 401(k) or a Roth account can be a considerable tax advantage in the long run. Money invested in these savings plans can grow and be withdrawn tax-free.
- Save for college — If you contribute to a 529 savings plan, you do not have to pay tax on the earnings or withdrawals. Under the current laws of the Tax Cuts and Jobs Act, you can use the savings in your 529 to pay for private or public-school tuition for grades K-12 and college.
- Hold on for one year – The tax rates for short-term gains are quite a bit higher than the long-term rates. If you can wait to sell, use the time factor to your advantage.
What is a capital loss and how is it taxed?
When you sell an asset, the difference between the cost basis of the property and the amount it is sold for determines whether it is a capital gain or loss. A capital loss occurs when an asset is sold for less than the cost basis. The basis is typically the cost of the property you acquired. The cost includes the amount you pay in cash, debt obligations, other property, or services.
The adjusted cost basis is the original cost of the property, plus or minus certain additions or deductions. Circumstances like if you received the property through gift or inheritance will impact how your cost basis is determined.
Capital losses will also be reported on Schedule D of Form 1040 and will offset your overall capital gains. However, there is a limitation on the amount of capital losses that can be claimed. Once your gains have been offset, excess losses up to $3,000 can be claimed on your return ($1,500 if you are married filing separately).
