If you have ever sold an investment property, stocks, or valuable artwork, you might be familiar with the term capital gains tax. 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.
What is capital gains tax?
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 called 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.
Read also: What Do I Need to Know About Capital Gains 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 rate for 2023 and 2024
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
- Income thresholds for 2023 (returns filed in 2024)
- Income thresholds for 2024 (returns filed in 2025)
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 |
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 |
Exceptions to capital gains tax
Some of your assets may be partially or fully exempt from capital gains taxes. For instance, 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).
Another exception to capital gains tax applies to collectible items whose value has increased more than their original purchase price due to their rarity, historical significance, or other unique qualities. Capital gains from collectible items are subject to a maximum tax rate of 28%.
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.
You may also be interested in reading: Capital Gains on Sale of a Home
What is a capital loss?
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).
Read also: How do I Report the Sale of Inherited Property?
Capital gains tax FAQs
Get quick answers to your capital gains questions here.
How much is capital gains tax?
The amount of capital gains tax you pay is dependent on the amount of your capital gain, whether it is a short-term or a long-term investment, as well as your taxable income. These factors will determine the tax rate used to calculate your capital gains tax liability.
What is the capital gains tax rate?
Capital gains taxes differs based on if you had a short-term or long-term capital gain. Short-term gains (investments held for less than one year) are taxed at the same rate as ordinary income, while long-term gains (investments held for more than one year) run from 0% to 20%
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.
