Capital gains are the financial profit you earn when you sell an asset like a home, business or stocks. Those gains are subject to capital-gains taxes, but capital gains are taxed differently depending on how long you owned the asset. That’s because, while the federal government encourages Americans to invest, Uncle Sam also nudges people to think long term when it comes to investing.
Here’s how the government encourages investors to buy and hold: While the amount of capital-gains tax you’ll owe on profitable investments will depend on your taxable income and filing status, how long you owned that asset is actually the bigger differentiator in how much tax you’ll pay on capital gains. If you sell an asset less than a year after you bought it, you’re going to pay more in taxes than if you’d held that asset for more than a year.
To maximize your profit, it’s important to be mindful of the different rates you’ll pay for short-term vs. long-term capital gains. Gains on investments that you’ve owned for one year or less, known as short-term capital gains, are taxed at the same rate as ordinary income. Gains on assets you’ve owned for longer than a year, aka long-term capital gains, are typically taxed at a much lower rate, or even not taxed at all, depending on your income and filing status.
What is a capital gain?
A capital gain is typically calculated in a fairly straightforward manner: It’s the difference between the amount you sold an asset for versus the cost basis (what you paid for it, plus additional expenses in some cases). There are exceptions to that calculation. For example, the IRS treats cost basis differently for assets received as a gift or inheritance.
Anytime you sell an asset for more than you bought it, you’ve “realized” a capital gain. That’s when taxes will potentially kick in, depending on what the asset was, how long you held it and your taxable income and filing status. Note that generally gains aren’t taxable until you sell the asset. Before the sale of the investment, any appreciation is considered an “unrealized” capital gain. (Keep in mind that mutual funds may pass along capital gains to you even though you didn’t sell the mutual fund. These gains happen when the fund sells some of its holdings, and you’ll likely owe capital gains tax on those payouts.)
A variety of assets may be subject to capital-gains taxes, including:
- Financial assets such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), commodities and cryptocurrency
- Vehicles
- Home furnishings
- Business assets
- Partnerships and limited liability companies (LLCs)
Special rules for capital gains taxes may apply to the profitable sale of various types of real estate and collectibles, so it’s important to check the IRS rules. Notably, there is a home sale tax exclusion if you have a capital gain from the sale of your primary residence and you meet certain requirements.
If you sold an asset for less than you bought it, that’s known as a capital loss. The IRS doesn’t tax you on losses and you may be able to reduce your taxable income with capital losses.
Also note that some high earners might be subject to a net investment income tax if they have a significant amount of investment income and their modified adjusted gross income meets certain thresholds.
Short-term vs. long-term capital gains
Generally, the IRS classifies capital gains (and losses) into two categories, short-term and long-term, and the general rule to differentiate them is the one-year mark.
The IRS typically offers more favorable tax rates for long-term capital gains. Short-term capital gains are taxed at the same rates that apply to your ordinary income, which range from 10 percent to 37 percent in 2024 and 2025.
Long-term capital gains, on the other hand, are taxed at rates of 0 percent, 15 percent or 20 percent in 2024 and 2025.
With both short- or long-term capital gains, the IRS is focused on the net gain — meaning the difference between your net capital gains for the year minus your net capital losses.
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Short-term capital gains tax rates
Short-term capital gains are treated like ordinary income, which means you’ll be taxed at the rate that applies to you based on your taxable income and filing status.
If you realized a net short-term capital gain in 2024, the following tax rates will apply.
2024 tax brackets (for tax returns due in 2025)
| Tax rate | Single | Head of household | Married filing jointly or qualified surviving spouse |
Married filing separately |
|---|---|---|---|---|
| 10% | $0 to $11,600 | $0 to $16,550 | $0 to $23,200 | $0 to $11,600 |
| 12% | $11,600 to $47,150 | $16,550 to $63,100 | $23,200 to $94,300 | $11,600 to $47,150 |
| 22% | $47,150 to $100,525 | $63,100 to $100,500 | $94,300 to $201,050 | $47,150 to $100,525 |
| 24% | $100,525 to $191,950 | $100,500 to $191,950 | $201,050 to $383,900 | $100,525 to $191,950 |
| 32% | $191,950 to $243,725 | $191,950 to $243,700 | $383,900 to $487,450 | $191,950 to $243,725 |
| 35% | $243,725 to $609,350 | $243,700 to $609,350 | $487,450 to $731,200 | $243,725 to $365,600 |
| 37% | $609,350 or more | $609,350 or more | $731,200 or more | $365,600 or more |
| Source: IRS |
If you realize a net short-term capital gain in 2025, the following tax rates will apply:
2025 tax brackets (for tax returns due in 2026)
| Tax rate | Single | Head of household | Married filing jointly or qualified surviving spouse |
Married filing separately |
|---|---|---|---|---|
| 10% | $0 to $11,925 | $0 to $17,000 | $0 to $23,850 | $0 to $11,925 |
| 12% | $11,925 to $48,475 | $17,000 to $64,850 | $23,850 to $96,950 | $11,925 to $48,475 |
| 22% | $48,475 to $103,350 | $64,850 to $103,350 | $96,950 to $206,700 | $48,475 to $103,350 |
| 24% | $103,350 to $197,300 | $103,350 to $197,300 | $206,700 to $394,600 | $103,350 to $197,300 |
| 32% | $197,300 to $250,525 | $197,300 to $250,500 | $394,600 to $501,050 | $197,300 to $250,525 |
| 35% | $250,525 to $626,350 | $250,500 to $626,350 | $501,050 to $751,600 | $250,525 to $375,800 |
| 37% | $626,350 or more | $626,350 or more | $751,600 or more | $375,800 or more |
| Source: IRS |
Long-term capital gains tax rates
Lower tax rates will generally apply to the net long-term capital gains you realized on assets that you owned for longer than one year. There are only three tax brackets for long-term capital gains in 2024 and 2025.
If you realized a net long-term capital gain in 2024, the following tax rates will apply:
2024 long-term capital gains tax rates
| Tax rate | Single | Head of household | Married filing jointly or qualified surviving spouse |
Married filing separately |
|---|---|---|---|---|
| 0% | $0 to $47,025 | $0 to $63,000 | $0 to $94,050 | $0 to $47,025 |
| 15% | $47,025 to $518,900 | $63,000 to $551,350 | $94,050 to $583,750 | $47,025 to $291,850 |
| 20% | $518,900 or more | $551,350 or more | $583,750 or more | $291,850 or more |
| Source: IRS |
If you realize a net long-term capital gain in 2025, the following tax rates will apply:
2025 long-term capital gains tax rates
| Tax rate | Single | Head of household | Married filing jointly or qualified surviving spouse |
Married filing separately |
|---|---|---|---|---|
| 0% | $0 to $48,350 | $0 to $64,750 | $0 to $96,700 | $0 to $48,350 |
| 15% | $48,350 to $518,900 | $64,750 to $566,700 | $96,700 to $600,050 | $48,350 to $300,000 |
| 20% | $533,400 or more | $566,700 or more | $600,050 or more | $300,000 or more |
| Source: IRS |
Example of short-term vs. long-term capital gains
Say that you’re single, your taxable income in 2025 is $100,000, and this year you bought $1,000 worth of stock. You then sold those shares three months later for $2,000. Your capital gain in this example is $1,000 and it’s a short-term gain. With taxable income of $100,000, your marginal tax rate is 22 percent, so you’ll owe $220.
If, however, you hold onto those shares for more than a year, and then you sell for $2,000, your capital gain is still $1,000, but it’s a long-term capital gain. At income of $100,000, your long-term capital gains tax rate is 15 percent, so your tax bill on the gain is $150.
How to reduce your capital gains
It may be difficult to completely avoid paying taxes on capital gains, depending on what assets you sell in a given year. But you may be able to reduce or potentially eliminate your capital gains tax burden with the following strategies:
- Hold assets for longer than a year before you sell. If you’re looking to sell a stock in your portfolio, check to see when you bought it. By waiting to sell until that one-year mark passes, you will qualify for a lower tax rate on the profit you earned.
- Offset capital gains with capital losses. A strategy known as tax-loss harvesting allows you to offset your capital gains with capital losses, which will then reduce your overall capital gains tax liability (though you need to be aware of what’s known as the wash-sale rule). Long-term losses offset long-term gains, while short-term losses can offset short-term gains, and then net capital losses could reduce your taxable income by up to $3,000 a year.
- Carry over losses into the next year. If you have net capital losses that exceed $3,000, you may be able to carry an excess amount into the next tax year — and beyond.
- Maximize the benefits of tax-free accounts. Money that you set aside for long-term goals like retirement, your child’s education and health savings can grow tax-free or tax-deferred in accounts like an IRA, 401(k), 529 plan or a health savings account (HSA). Any investments that you sell at a profit in these accounts aren’t subject to the capital gains tax — that’s why some investors opt to trade stocks, ETFs and other investments in an IRA rather than a taxable brokerage account, thereby minimizing their tax liability.
- Mind how quickly you sell your home. Single filers can exclude up to $250,000 of their capital gains from a home sale and joint filers can exclude up to $500,000, provided that you lived in the home for two of the last five years before selling it.
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