Capital Gains Tax: How It Works, Rates and Calculator

If you’re thinking of investing or selling a stock, it’s important to familiarize yourself with the term “capital gains tax” before you begin.

The profit you make from the sale of capital assets, such as stock, houses, cars or other types of investments, is considered income in the eyes of the IRS. How it gets taxed depends on a few factors, including your income.

What is capital gains tax?

A capital gains tax is a tax on the profit from the sale of an asset. How your capital gain is taxed depends on your filing status, taxable income and how long you owned the asset before selling it. Capital gains taxes are progressive, similar to income taxes.

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 are taxed according to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

How does capital gains tax work?

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

The holding period — the time between buying the asset and selling it — determines how the profit is 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.

Long-term capital gains tax

A long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. Long-term capital gains tax rates are generally lower and more favorable than short-term capital gains tax rates.

The long-term capital gains tax rate is 0%, 15% or 20%. The rate depends on your taxable income and filing status, but the IRS says most people pay no more than 15% on their long-term capital gains^[0]

Short-term capital gains tax

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 rates.

Capital gains tax rate 2023

These long-term capital gain 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 by April 15, 2024, or Oct. 15, 2024, with an extension.

» 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.

Capital gains tax rate 2024

These long-term capital gains tax rates apply to assets sold for a profit in 2024, which are reported on tax returns filed in 2025.

Capital gains tax calculator

Use this capital gains calculator to estimate your taxes on assets sold in 2023 (taxes filed in 2024).

Capital gains tax rules and considerations

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]

• 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.

How to avoid or reduce capital gains taxes

Whenever possible, hold an asset for longer than a year 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). The IRS lets you 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.

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