What Are Capital Gains?
If you're reading about capital gains, it probably means your investments have performed well. Or you're preparing for when they do in the future.
When you have built a low-cost, diversified portfolio and the assets being held are worth more than what you paid for them, you might consider selling some of those assets to realize those capital gains.
Capital gains are defined as the profits that you make when you sell investments like stocks or real estate. These include short-term gains for investments held and sold in less than one year and long-term gains for those held and sold in a period that is over a year.
Capital gains and losses will either increase or decrease the value of your investment. But you only have to pay capital gains taxes after selling an investment – the money you make from an investment is subject to taxation at the federal and state levels. But you should also note that you might be able to lower your capital gains taxes with the sale of an investment that is losing money (more on tax-harvesting below).
A financial advisor can help you manage your investment portfolio. To find a financial advisor who serves your area, try SmartAsset's free online matching tool.
Capital Gains: How Much Will I Pay?
Let's say you buy some stock for a low price and after a certain period of time the value of that stock has risen substantially. You decide you want to sell your stock and capitalize on the increase in value.
The profit you make when you sell your stock (and other similar assets, like real estate) is equal to your capital gain on the sale. The IRS taxes capital gains at the federal level and some states also tax capital gains at the state level. The tax rate you pay on your capital gains depends in part on how long you hold the asset before selling.
Taxes on Long-Term Capital Gains
Long-term capital gains are gains on assets you hold for more than one year. They're taxed at lower rates than short-term capital gains.
Depending on your regular income tax bracket, your tax rate for long-term capital gains could be as low as 0%. Even taxpayers in the top income tax bracket pay long-term capital gains rates that are nearly half of their income tax rates. That's why some high net worth Americans don't pay as much in taxes as you might expect.
The table below breaks down how much you would owe in long-term capital gains for tax year 2023 (which is filed in early 2024), based on your tax-filing status and income:
Long-Term Capital Gains Taxes for Tax Year 2023 (Due April 2024)
- Single Filers
- Married, Filing Jointly
- Married, Filing Separately
- Head of Household
| Single Filers | |
| Taxable Income | Rate |
|---|---|
| $0 - $44,625 | 0% |
| $44,625 - $492,300 | 15% |
| $492,300+ | 20% |
| Married, Filing Jointly | |
| Taxable Income | Rate |
|---|---|
| $0 - $89,250 | 0% |
| $89,250 - $553,850 | 15% |
| $553,850+ | 20% |
| Married, Filing Separately | |
| Taxable Income | Rate |
|---|---|
| $0 - $44,625 | 0% |
| $44,625 - $276,900 | 15% |
| $276,900+ | 20% |
| Head of Household | |
| Taxable Income | Rate |
|---|---|
| $0 - $59,750 | 0% |
| $59,750 - $523,050 | 15% |
| $523,050+ | 20% |
The next table shows the long-term capital gains tax rates and brackets for tax year 2024 (which is filed in early 2025), based on your tax-filing status and income:
Long-Term Capital Gains Taxes for Tax Year 2024 (Due April 2025)
- Single Filers
- Married, Filing Jointly
- Married, Filing Separately
- Head of Household
| Single Filers | |
| Taxable Income | Rate |
|---|---|
| $0 - $47,025 | 0% |
| $47,025 - $518,900 | 15% |
| $518,900+ | 20% |
| Married, Filing Jointly | |
| Taxable Income | Rate |
|---|---|
| $0 - $94,050 | 0% |
| $94,050 - $583,750 | 15% |
| $583,750+ | 20% |
| Married, Filing Separately | |
| Taxable Income | Rate |
|---|---|
| $0 - $47,025 | 0% |
| $47,025 - $291,850 | 15% |
| $291,850+ | 20% |
| Head of Household | |
| Taxable Income | Rate |
|---|---|
| $0 - $63,000 | 0% |
| $63,000 - $551,350 | 15% |
| $551,350+ | 20% |
Taxes on Short-Term Capital Gains
Short-term capital gains are gains you make from selling assets held for one year or less. They're taxed like regular income. That means you pay the same tax rates that are paid on federal income tax.
For tax year 2023 (which is filed in early 2024), single investors earning over $578,125 will pay a maximum of 37% on short-term capital gains. The table below breaks down the income brackets for each filing status for the 2023 tax year:
Short-Term Capital Gains Taxes for Tax Year 2023 (Due April 2024)
- Single Filers
- Married, Filing Jointly
- Married, Filing Separately
- Head of Household
| Single Filers | |
| Taxable Income | Rate |
|---|---|
| $0 - $11,000 | 10% |
| $11,000 - $44,725 | 12% |
| $44,725 - $95,375 | 22% |
| $95,375 - $182,100 | 24% |
| $182,100 - $231,250 | 32% |
| $231,250 - $578,125 | 35% |
| $578,125+ | 37% |
| Married, Filing Jointly | |
| Taxable Income | Rate |
|---|---|
| $0 - $22,000 | 10% |
| $22,000 - $89,450 | 12% |
| $89,450 - $190,750 | 22% |
| $190,750 - $364,200 | 24% |
| $364,200 - $462,500 | 32% |
| $462,500 - $693,750 | 35% |
| $693,750+ | 37% |
| Married, Filing Separately | |
| Taxable Income | Rate |
|---|---|
| $0 - $11,000 | 10% |
| $11,000 - $44,725 | 12% |
| $44,725 - $95,375 | 22% |
| $95,375 - $182,100 | 24% |
| $182,100 - $231,250 | 32% |
| $231,250 - $346,875 | 35% |
| $346,875+ | 37% |
| Head of Household | |
| Taxable Income | Rate |
|---|---|
| $0 - $15,700 | 10% |
| $15,700 - $59,850 | 12% |
| $59,850 – $95,350 | 22% |
| $95,350 - $182,100 | 24% |
| $182,100 - $231,250 | 32% |
| $231,250 - $578,100 | 35% |
| $578,100+ | 37% |
This table shows the same short-term capital gains tax rates and brackets, but for tax year 2024 (which is filed in early 2025):
Short-Term Capital Gains Taxes for Tax Year 2024 (Due April 2025)
- Single Filers
- Married, Filing Jointly
- Married, Filing Separately
- Head of Household
| Single Filers | |
| Taxable Income | Rate |
|---|---|
| $0 - $11,600 | 10% |
| $11,600 - $47,150 | 12% |
| $47,150 - $100,525 | 22% |
| $100,525 - $191,950 | 24% |
| $191,950 - $243,725 | 32% |
| $243,725 - $609,350 | 35% |
| $609,350+ | 37% |
| Married, Filing Jointly | |
| Taxable Income | Rate |
|---|---|
| $0 - $23,200 | 10% |
| $23,200 - $94,300 | 12% |
| $94,300 - $201,050 | 22% |
| $201,050 - $383,900 | 24% |
| $383,900 - $487,450 | 32% |
| $487,450 - $731,200 | 35% |
| $731,200+ | 37% |
| Married, Filing Separately | |
| Taxable Income | Rate |
|---|---|
| $0 - $11,600 | 10% |
| $11,600 - $47,150 | 12% |
| $47,150 - $100,525 | 22% |
| $100,525 - $191,950 | 24% |
| $191,950 - $243,725 | 32% |
| $243,725 - $365,600 | 35% |
| $365,600+ | 37% |
| Head of Household | |
| Taxable Income | Rate |
|---|---|
| $0 - $16,550 | 10% |
| $16,550 - $63,100 | 12% |
| $63,100 - $100,500 | 22% |
| $100,500 - $191,950 | 24% |
| $191,950 - $243,700 | 32% |
| $243,700 - $609,350 | 35% |
| $609,350+ | 37% |
To recap: The amount you pay in federal capital gains taxes is based on the size of your gains, your federal income tax bracket and how long you have held on to the asset in question.
To figure out the size of your capital gains, you need to know your basis. Basis is the amount you paid for an asset. How much you owe in taxes - your tax liability - stems from the difference between the sale price of your asset and the basis you have in that asset. In plain English, that means you pay tax based on your profit.
How Earned and Unearned Income Affect Capital Gains
Why the difference between the regular income tax and the tax on long-term capital gains at the federal level? It comes down to the difference between earned and unearned income. In the eyes of the IRS, these two forms of income are different and deserve different tax treatment.
Earned income is what you make from your job. Whether you own your own business or work part-time at the coffee shop down the street, the money you make is earned income.
Unearned income comes from interest, dividends and capital gains. It's money that you make from other money. Even if you're actively day trading on your laptop, the income you make from your investments is considered passive. So in this case, "unearned" doesn't mean you don't deserve that money. It simply denotes that you earned it in a different way than through a typical salary.
The question of how to tax unearned income has become a political issue. Some say it should be taxed at a rate higher than the earned income tax rate, because it is money that people make without working, not from the sweat of their brow. Others think the rate should be even lower than it is, so as to encourage the investment that helps drive the economy.
How to Lower Capital Gains Taxes With Tax-Loss Harvesting
No one likes to face a large tax bill in April. Of the many ways to lower your tax liability, tax-loss harvesting is among the more common - and the more complicated.
Tax-loss harvesting is a strategy that allows investors to avoid paying capital gains taxes. It uses the money that you lose on an investment to offset the capital gains that you earned on the sale of profitable investments. This means that you can write off those losses when you sell the depreciated asset, which cancels out some or all of your capital gains on appreciated assets.
You can even wait and re-purchase the assets you sold at a loss if you want them back, but you'll still get a tax write-off if you time it right. Some robo-advisor firms have found ways to automate this process by frequently selling investments at a loss and then immediately buying a very similar asset. This allows you to stay invested in the market while still taking advantage of the tax deductions from your losses.
Some investors include tax-loss harvesting in their overall portfolio investment strategy to save money. Others say that it costs you more in the long run because you're selling assets that could appreciate in the future for a short-term tax break.. And if you repurchase the stock, you're essentially deferring your capital gains taxation to a later year. Critics of tax-loss harvesting also point out that since Congress can make changes to the tax code, you could also run the risk of paying high taxes when you sell your assets later.
State Taxes on Capital Gains
Some states also levy taxes on capital gains. Most states tax capital gains according to the same tax rates they use for regular income. So, if you're lucky enough to live somewhere with no state income tax, you won't have to worry about capital gains taxes at the state level.
New Hampshire, for example, doesn't tax income, but does tax dividends and interest. By comparison, states with high income tax California, New York, Oregon, Minnesota, New Jersey and Vermont) also have high taxes on capital gains too. A good capital gains calculator, like ours, takes both federal and state taxation into account.
Capital Gains Taxes on Property
If you own a home, you may be wondering how the government taxes profits from home sales. As with other assets such as stocks, capital gains on a home are equal to the difference between the sale price and the seller's basis.
Your basis in your home is what you paid for it, plus closing costs and non-decorative investments you made in the property, like a new roof. You can also add sales expenses like real estate agent fees to your basis. Subtract that from the sale price and you get the capital gains. When you sell your primary residence, $250,000 of capital gains (or $500,000 for a couple) are exempted from capital gains taxation. This is generally true only if you have owned and used your home as your main residence for at least two out of the five years prior to the sale.
If you inherit a home, you don't get the $250,000 exemption unless you've owned the house for at least two years as your primary residence. But you can still get a break if you don't meet that criteria. When you inherit a home you get a "step up in basis."
Say your mother's basis in the family home was $200,000. Today the market value of the home is $300,000. If your mom passes on the home to you, you'll automatically get a stepped-up basis equal to the market value of $300,000. If you sell the home for that amount then you don't have to pay capital gains taxes. If you later sell the home for $350,000 you only pay capital gains taxes on the $50,000 difference between the sale price and your stepped-up basis. If you’ve owned it for more than two years and used it as your primary residence, you wouldn’t pay any capital gains taxes.
Stepped-up basis is somewhat controversial and might not be around forever. As always, the more valuable your family's estate, the more it pays to consult a professional tax adviser who can work with you on minimizing taxes if that's your goal.
Net Investment Income Tax (NIIT)
Under certain circ*mstances, the net investment income tax, or NIIT, can affect income you receive from your investments. While it mostly applies to individuals, this tax can also be levied on the income of estates and trusts. The NIIT is levied on the lesser of your net investment income and the amount by which your modified adjusted gross income (MAGI) is higher than the NIIT thresholds set by the IRS. These thresholds are based on your tax filing status, and they go as follows:
- Single: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Qualifying widow(er) with dependent child: $250,000
- Head of household: $200,000
The NIIT tax rate is 3.8%. The tax only applies for U.S. citizens and resident aliens, so nonresident aliens are not required to pay it. According to the IRS, net investment income includes interest, dividends, capital gains, rental income, royalty income, non-qualified annuities, income from businesses that are involved in the trading of financial instruments or commodities and income from businesses that are passive to the taxpayer.
Here's an example of how the NIIT works: Let's say you file your taxes jointly with your spouse and together you have $200,000 in wages. The threshold for your filing status is $250,000, which means you don't owe the NIIT solely based on that income. However, you also have $75,000 in net investment income from capital gains, rental income and dividends, which pushes your total income to $275,000. Because your income is now $25,000 past the threshold, and that number is the lesser of $75,000 (your total net investment income), then you would owe taxes on that $25,000. At a 3.8% tax rate, you'd have to pay $950.
