Capital Gains Tax: Meaning, Rates and Calculator

If you’re thinking of diving into investing or selling a capital asset, it’s important to get acquainted with the term “capital gains tax” before you begin wheeling and dealing.

Profit you make from the sale of an investment, such as a stock, or from the sale of another capital asset, such as a car, is considered income in the eyes of the IRS, and how it gets taxed — and at what rate — depends on a few factors, including your income.

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Capital gain refers to the profit made from the sale of capital assets, such as stock, houses, cars or other types of investments. Capital losses, on the other hand, are assets that have been sold for less than their original purchase price or cost basis.

A capital gains tax is a tax on the profit from the sale of an asset. How the capital gain is taxed depends on filing status, taxable income and how long the asset was owned before selling.

The capital gains tax rate is 0%, 15% or 20% on most assets held for longer than a year. Capital gains taxes on assets held for a year or less correspond to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

Capital gains taxes apply to the sale of capital assets for profit. This can include investments such as stocks, bonds, cryptocurrency, real estate, cars, boats and other tangible items.

Capital gains taxes are progressive, similar to income taxes. When you sell an investment, that profit is considered taxable income. The holding period — the time between when you bought the asset and when you sold it — determines how the profit gets classified for tax purposes. Profits made on assets held for a year or less before sale are considered short-term capital gains. Profits made on assets held for longer than a year are long-term capital gains.

Short-term capital gains are taxed according to the relevant federal tax rate. Long-term capital gains are subject to 0%, 15% or 20%, depending on your taxable income. According to the IRS, most people pay no more than 15% on their long-term capital gains.^[0]

A long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is 0%, 15% or 20%, depending on your taxable income and filing status. Long-term capital gains tax rates are generally lower than short-term capital gains tax rates.

A short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less. Short-term capital gains are added to income and taxed at your ordinary income tax rate, or your tax bracket.

2023 capital gains tax rates apply to assets sold for a profit in 2023. Capital gains are reported on Schedule D, which is submitted with your federal tax return (Form 1040) by April 15, 2024, or October 2024, with an extension.

The table below provides an overview of the tax rates that apply to long-term gains based on taxable income.

» Looking for a way to defer capital gains taxes? Putting money in an IRA or a 401(k) could help postpone or even avoid future capital gains tax bills.

Use this capital gains calculator to estimate your taxes on assets sold in 2023.

2024 capital gains tax rates apply to assets sold for a profit in 2024. Capital gains are reported on Schedule D, which will be due with your federal tax return (Form 1040) by the April 2025 tax filing deadline, or by October 2025 with an extension.

The table below provides an overview of the long-term capital gains tax rates based on taxable income.

Here are some other notable rules and exceptions that come into play.

The capital gains tax rates in the tables above apply to most assets, but there are some noteworthy exceptions. Long-term capital gains on so-called “collectible assets” can be taxed at a maximum of 28%. This includes items such as coins, precious metals, antiques and fine art. Short-term gains on such assets are taxed at the ordinary income tax rate.^[0]

» Traded cryptocurrency last year? Other rules for crypto taxes

Some investors may owe an additional 3.8% of either your net investment income or the amount by which your modified adjusted gross income exceeds the amounts listed below — whichever is smaller.^[0]

The income thresholds that might make investors subject to the net investment income tax are:

• Single or head of household: $200,000.

• Married, filing jointly: $250,000.

• Married, filing separately: $125,000.

• Qualifying widow(er) with dependent child: $250,000.

» Having trouble deciding whether and when to sell? A qualified financial advisor can help you understand your options.

Whenever possible, hold an asset for a year or longer so you can qualify for the long-term capital gains tax rate, since it’s significantly lower than the short-term capital gains rate for most assets. Our capital gains tax calculator shows how much that could save.

These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don’t have to pay capital gains tax if you sell investments within these accounts. Roth IRAs and 529 accounts in particular have big tax advantages. Qualified distributions from those are tax-free; in other words, you don’t pay any taxes on investment earnings. With traditional IRAs and 401(k)s, you’ll pay taxes when you take distributions from the accounts in retirement.

Rather than reinvest dividends in the investment that paid them, rebalance by putting that money into your underperforming investments. Typically, you’d rebalance by selling securities that are doing well and putting that money into those that are underperforming. But using dividends to invest in underperforming assets will allow you to avoid selling strong performers — and thus avoid capital gains that would come from that sale.

To qualify, you must have owned your home and used it as your main residence for at least two years in the five-year period before you sell it. You also must not have excluded another home from capital gains in the two-year period before the home sale. If you meet those rules, you can exclude up to $250,000 in gains from a home sale if you’re single and up to $500,000 if you’re married filing jointly.

The IRS taxes your net capital gain, which is simply your total capital gains (investments sold for a profit) minus your total capital losses (investments sold at a loss). This means that you can use investment capital losses to offset gains. For example, if you sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains of $6,000.

If your net capital loss exceeds your net capital gains, you can offset your ordinary income by up to $3,000 ($1,500 for those married filing separately). Any additional losses can be carried forward to future years to offset capital gains or up to $3,000 of ordinary income per year.

Robo-advisors manage your investments for you automatically, and they often employ smart tax strategies, including tax-loss harvesting, which involves selling losing investments to offset the gains from winners.

» Ready to get started? See our picks for best robo-advisors