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Capital gains tax is a tax you pay when you turn a profit by selling assets. Taxable capital assets include investments like stocks and exchange-traded funds, cars, boats, art, antiques, cryptocurrency and real estate. Capital gains may be taxed as ordinary income or at special capital gains tax rates for long-term investments.
Here are some key things to know about capital gains taxes: what they are, how they work and how to reduce them where you can.
What Is Capital Gains Tax?
Capital gains taxes apply when you sell an asset for more than you paid for it. For example, if you bought 100 shares of a stock for $10,000 and sold them for $15,000, you might pay capital gains tax on your $5,000 profit.
Capital gains taxes vary depending on the type of assets sold, your income and tax filing status, and the length of time you've owned the asset. Here are a few basics:
- Unrealized gains aren't taxed. If your home's value increases but you don't sell it, you don't have a realized (taxable) gain. Gains are only realized when you sell an asset.
- Assets sold for less than you paid are capital losses. When you sell investments or property for less than you paid, the capital loss may reduce your taxes.
- Assets held for a year or less are taxed as short-term capital gains. Short-term capital gains are taxed as ordinary income, based on your regular tax bracket. Marginal tax rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- Long-term capital gains may be taxed at lower rates. Long-term capital gains tax rates of 0%, 15% or 20% apply to assets held for more than a year before being sold.
What Are Capital Gains?
The IRS considers capital assets to be "almost everything you own and use for personal or investment purposes." Capital assets include stocks, bonds, mutual funds, cryptocurrencies, real estate, cars, boats, jewelry and collectibles. When you sell a capital asset for more than you paid for it, you generate a capital gain.
Assets held for more than a year are considered long-term capital gains. Assets sold within a year or less are considered short-term capital gains. If you sell an asset for less than you paid for it, you have a capital loss. You can use some capital losses to offset your capital gains, but losses from personal property like your home or car aren't tax deductible.
A net capital gain is the difference between your net long-term capital gain for the year and your net short-term capital loss.
How to Calculate Capital Gains
The simple formula for estimating a capital gain is to subtract your cost basis (what you paid for an asset) from your sale price. When calculating capital gains taxes on your tax return, use Schedule D (Form 1040) and gather up the following information. You can find information on your investments on 1099-B or 1099-S forms from your investment firm.
- Short-term gains: Purchase price and sale price for assets held for one year or less
- Long-term gains: Purchase price and sale price for assets held for more than a year
Add together your short-term and long-term capital gains. Separately, total up your long-term and short-term capital losses. Subtract your total long-term losses from your long-term gains (or vice-versa), then subtract your short-term losses from your short-term gains.
Example
For 2024, suppose your 1099 forms show capital gains and losses as follows:
- Long-term capital gains of $1,200
- Short-term capital gains of $4,000
- Long-term capital losses of $1,800
- Short-term capital losses of $500
You have a long-term capital loss of $600 ($1,800 - $1,200) and a short-term capital gain of $3,500 ($4,000 - $500). You can reconcile your $600 long-term loss against your $3,500 short-term gain for a net short-term gain of $2,900.
A short-term gain is taxed as regular income (see short-term capital gains rates below), while long-term gains would be taxed at long-term capital gains rates (see long-term rates below).
Special Capital Gains Tax Exceptions
A few special exceptions apply for the sale of a primary residence, investment property and collectibles. High-income investors may also be subject to an additional investment tax. Here's what to know about these exceptions.
Sale of a Home
Some capital gains from the sale of your home may be excludable if you meet IRS eligibility requirements. You can exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) if the home was your principal residence and you've lived there for at least two of the last five years.
Transferring a home to your spouse or ex-spouse: If you transfer ownership of a home to your spouse or ex-spouse as part of a divorce settlement, the IRS typically doesn't count the gain or loss.
Closing costs and home improvements: You may be able to subtract some closing costs and home improvement expenses from your net profit. See IRS Publication 523 for details.
Investment Property
If you've claimed deductions for depreciation on commercial property on past tax returns, the IRS may require you to pay taxes on the amount you've deducted when you sell. Suppose you bought a rental property for $500,000 and claimed $50,000 in depreciation on it over the years. If you sell the property for $600,000, you may owe capital gains tax on the $100,000 difference between the purchase price and the sale price, and additional tax on the $50,000 in depreciation you previously claimed. Recaptured depreciation is taxed at 25%.
Like-kind exchanges: Separately, if you sell an investment property and use the proceeds to purchase another investment property of the same type, you may not have to pay tax on your gain. Learn more about like-kind exchanges from IRS Form 8824.
Collectibles
Long-term gains from the sale of collectible items such as coins, antiques or art are taxed at a maximum rate of 28%. Short-term capital gains taxes on collectibles are taxed as ordinary income. If your marginal tax rate (or tax bracket) is less than 28%, you may pay less in capital gains taxes by selling your collectible(s) before a year is up.
Net Investment Income Tax
An additional 3.8% tax on investment income may apply if your modified adjusted gross income is greater than $200,000 for singles or heads of household, $250,000 for married couples filing jointly or $125,000 for married individuals filing separately.
When Do You Owe Capital Gains Taxes?
You must pay taxes on a capital gain in the year you realized the gain. So, for instance, if you sell your home for a profit in 2024, you'll report the gain on your 2024 tax return, due April 15, 2025.
If your gain is likely to result in a large tax bill, you may need to make quarterly estimated tax payments as well. In 2024, the IRS requires you to make estimated tax payments if you expect to owe at least $1,000 in tax after subtracting your withholding and tax credits, and you expect your withholding and tax credits to be less than either 90% of the tax shown on your 2024 return or 100% of the tax shown on your 2023 return. If in doubt, consult a tax advisor.
Short-Term Capital Gains Tax Rates for 2024
Short-term capital gains tax rates are the same as the marginal tax rates you pay on your wages or salary. Marginal tax rates for 2024 are shown below.
| Short-Term Capital Gains Rates for 2024 | ||||
|---|---|---|---|---|
| Rate | Single | Married, Filing Jointly and Qualifying Widow(er) | Married, Filing Separately | Head of Household |
| 10% | Up to $11,600 | Up to $23,200 | Up to $11,600 | Up to $16,550 |
| 12% | $11,601 - $47,150 | $23,201 - $94,300 | $11,601 - $47,150 | $16,551 - $63,100 |
| 22% | $47,151 - $100,525 | $94,301 - $201,050 | $47,151 - $100,525 | $63,101 - $100,500 |
| 24% | $100,526 - $191,950 | $201,051 - $383,900 | $100,526 - $191,950 | $100,501 - $191,950 |
| 32% | $191,951 - $243,725 | $383,901 - $487,450 | $191,951 - $243,725 | $191,951 - $243,700 |
| 35% | $243,726 - $609,350 | $487,451 - $731,200 | $243,726 - $365,600 | $243,701 - $609,350 |
| 37% | $609,351 and up | $731,201 and up | $365,601 and up | $609,351 and up |
Source: IRS
Long-Term Capital Gains Tax Rates for 2024
Special long-term capital gains tax rates apply to assets sold after more than a year. To find your long-term capital gains rate below, look for your tax filing status in the top column, then locate the box with your adjusted gross income (AGI). If you're married filing jointly and your AGI is $200,000, for example, your long-term capital gains rate is 15%.
| Long-Term Capital Gains Tax Rates for 2024 | ||||
|---|---|---|---|---|
| Rate | Single | Married, Filing Jointly and Qualifying Widow(er) | Married, Filing Separately | Head of Household |
| 0% | Up to $47,025 | Up to $94,050 | Up to $47,025 | Up to $63,000 |
| 15% | $47,026 - $518,900 | $94,051 - $583,750 | $47,026 - $291,850 | $63,001 - $551,350 |
| 20% | $518,901 and up | $583,751 and up | $291,851 and up | $551,351 and up |
Source: IRS
How to Avoid Capital Gains Taxes
Alas, you can't avoid paying capital gains taxes if you legitimately owe them. You can, however, use one or more of the following strategies to reduce your capital gains tax liability.
1. Hold Assets for at Least a Year
Depending on your tax bracket, long-term capital gains tax rates are likely to be lower than short-term capital gains tax rates based on your ordinary income. If that's the case, holding assets for at least a year before selling may save you money.
2. Invest in Tax-Advantaged Retirement Accounts
Traditional 401(k) accounts and individual retirement accounts (IRAs) allow you to defer paying taxes on capital gains and other earnings until you withdraw the funds from the account. In a Roth IRA or Roth 401(k), capital gains, dividends and interest you earn may be withdrawn tax-free when you follow eligibility guidelines.
One caveat: This strategy works best for money you intend to save for retirement. Both traditional and Roth retirement accounts have restrictions that can result in penalties and taxes when you withdraw funds early and/or don't meet plan requirements.
3. Capitalize on Losses
If you've taken a loss on the sale of stocks, real estate or other assets, you can use your capital losses to offset your capital gains. Did you have more losses than gains this year? You may be able to use up to $3,000 of your remaining loss to offset your income dollar-for-dollar, and can carry over up to $3,000 in losses in each of the following years until your loss is used up.
Tax-loss harvesting means deliberately selling investments at a loss to reduce your net capital gains for the year. If you have a lot of taxable gains, you may want to ask your investment advisor if tax-loss harvesting makes sense for you.
4. Donate Your Assets
Before making a cash donation to your favorite qualified charity, consider donating an asset instead. If you donate an asset (rather than selling it and donating the proceeds), you can receive an itemized tax deduction for the asset's fair market value—and you don't have to pay capital gains taxes on the profits.
The Bottom Line
Understanding your capital gains tax liability is key when you're measuring financial growth. If you're thinking of selling your home, for example, knowing how much you'll net after taxes may help you determine how much you can afford to spend on your next house. Forgoing yearly capital gains taxes by investing your retirement savings in a tax-advantaged account keeps more of your money in your account, compounding year over year.
Enlisting the help of an investment advisor or tax advisor (or both) can help ensure that you're in compliance with all capital gains tax laws—and that you're working the right strategies to keep your tax bill as small, and your gains as substantial, as possible.