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Understanding Capital Gains Taxes
When you sell an investment for more than you paid, the profit is called a capital gain. The IRS taxes capital gains differently based on how long you held the investment before selling. Understanding these rules can help you make smarter decisions about when to sell and how to structure your portfolio.
Short-Term vs. Long-Term Capital Gains
Short-term capital gains apply to assets held one year or less. These gains are taxed as ordinary income, meaning they are added to your regular income and taxed at your marginal tax rate, which can be as high as 37%.
Long-term capital gains apply to assets held for more than one year. These receive preferential tax rates of 0%, 15%, or 20%, depending on your taxable income and filing status.
2024 Long-Term Capital Gains Tax Brackets
| Tax Rate | Single Filer | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | Up to $47,025 | Up to $94,050 | Up to $63,000 |
| 15% | $47,026 - $518,900 | $94,051 - $583,750 | $63,001 - $551,350 |
| 20% | Over $518,900 | Over $583,750 | Over $551,350 |
High-income taxpayers may also owe an additional 3.8% Net Investment Income Tax (NIIT) on top of these rates.
2024 Federal Income Tax Brackets (for Short-Term Gains)
| Rate | Single Filer | Married Filing Jointly |
|---|---|---|
| 10% | Up to $11,600 | Up to $23,200 |
| 12% | $11,601 - $47,150 | $23,201 - $94,300 |
| 22% | $47,151 - $100,525 | $94,301 - $201,050 |
| 24% | $100,526 - $191,950 | $201,051 - $383,900 |
| 32% | $191,951 - $243,725 | $383,901 - $487,450 |
| 35% | $243,726 - $609,350 | $487,451 - $731,200 |
| 37% | Over $609,350 | Over $731,200 |
Strategies to Reduce Capital Gains Taxes
Hold Investments Longer
By holding investments for more than one year, you qualify for the lower long-term capital gains rates, which can save you a significant amount compared to short-term rates.
Tax-Loss Harvesting
Sell investments that are at a loss to offset gains from profitable sales. You can offset unlimited gains and deduct up to $3,000 in net losses per year against ordinary income.
Use Tax-Advantaged Accounts
Investments held in 401(k)s, IRAs, and Roth accounts grow tax-deferred or tax-free. You do not pay capital gains taxes on trades within these accounts.
Manage Your Income Timing
If you are near a bracket threshold, consider selling in a year when your income is lower. This can push your gains into a lower tax bracket, potentially even the 0% rate.
Capital Losses and Carryforward Rules
If your capital losses exceed your capital gains in a tax year, you can use up to $3,000 of the net loss to offset ordinary income ($1,500 if married filing separately). Any remaining losses carry forward to future tax years indefinitely. Short-term losses first offset short-term gains, and long-term losses first offset long-term gains, with any excess netting against the other category.
Frequently Asked Questions
Your cost basis is typically the original purchase price plus any commissions or fees paid to acquire the investment. If you received the investment as a gift, your cost basis is generally the donor's original cost basis. For inherited investments, the cost basis is usually stepped up to the fair market value on the date of death. Most brokerages track your cost basis automatically for investments purchased after 2011.
Qualified dividends are taxed at the same preferential rates as long-term capital gains (0%, 15%, or 20%). Non-qualified (ordinary) dividends are taxed as ordinary income at your marginal tax rate. To qualify for the lower rate, you must hold the stock for at least 60 days during the 121-day period surrounding the ex-dividend date. Most dividends from U.S. companies held in taxable accounts are qualified.
Most states tax capital gains as ordinary income, which means your state tax rate is added on top of the federal rate. A few states like Florida, Texas, Nevada, Washington, and Wyoming have no state income tax, meaning no state capital gains tax. Some states offer reduced rates for long-term gains. This calculator estimates federal taxes only, so factor in your state rate for a complete picture.
The NIIT is an additional 3.8% tax on net investment income for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). It applies to capital gains, dividends, interest, rental income, and royalties. This means high-income taxpayers could pay up to 23.8% on long-term capital gains (20% + 3.8% NIIT) plus any applicable state taxes.
The IRS treats cryptocurrency as property, so buying, selling, and trading crypto is subject to capital gains tax rules. Short-term gains on crypto held one year or less are taxed as ordinary income, while long-term gains on crypto held more than one year qualify for the lower capital gains rates. Every taxable crypto event, including trading one crypto for another, must be reported. You can use this calculator to estimate the tax on crypto gains as well.
