Capital gains taxes are a type of tax on the profits earned from the sale of assets such as stocks, real estate, businesses and other types of investments in non tax-advantaged accounts. When you acquire assets and sell them for a profit, the U.S. government looks at the gains as taxable income.
In simple terms, the capital gains tax is calculated by taking the total sale price of an asset and deducting the original cost. It is important to note that taxes are only due when you sell the asset, not during the period where you hold it.
There are various rules around how the Internal Revenue Service (IRS) taxes capital gains.
For most investors, the main tax considerations are:
- how long you’ve owned the asset
- the cost of owning that asset, including any fees you paid
- your income tax bracket
- your marital status
Once you sell an asset, capital gains become “realized gains.” During the time you own an asset, they are called “unrealized gains,” and you won’t owe capital gains taxes if you don’t sell.
Capital gains tax: Short-term vs. long-term
Capital gains taxes are divided into two big groups, short-term and long-term, depending on how long you’ve held the asset.
Here are the differences:
- Short-term capital gains tax is a tax applied to profits from selling an asset you’ve held for less than a year. Short-term capital gains taxes are paid at the same rate as you’d pay on your ordinary income, such as wages from a job.
- Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0 percent, 15 percent and 20 percent, depending on your income. These rates are typically much lower than the ordinary income tax rate.
Sales of real estate and other types of assets have their own specific form of capital gains and are governed by their own set of rules (discussed below).
What is the long-term capital gains tax rate?
While the capital gains tax rates did not change under the Tax Cuts and Jobs Act of 2017, the income required to qualify for each bracket goes up each year to account for workers’ increasing incomes. Here are the details on capital gains rates for the 2023 and 2024 tax years.
2024 Long-Term Capital Gains Tax Rates
| Filing Status | Maximum Zero Rate Amount: | Maximum 15% Rate Amount: |
|---|---|---|
| Married Filing Jointly & Surviving Spouses | $94,050 | $583,750 |
| Married Filing Separately | $47,025 | $291,850 |
| Heads of Household | $63,000 | $551,350 |
| Individual Taxpayers | $47,025 | $518,900 |
| Trusts and Estates | $3,150 | $15,450 |
What is the short-term capital gains tax rate?
Meanwhile, for short-term capital gains, the tax brackets for ordinary income taxes apply. The 2023-2024 tax brackets are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
Unlike the long-term capital gains tax rate, there is no 0 percent rate or 20 percent ceiling for short-term capital gains taxes.
Do you pay state taxes on capital gains?
In general, you’ll pay state taxes on your capital gains in addition to federal taxes, though there are some exceptions. Most states simply tax your investment income at the same rate that they already charge for earned income, but some tax them differently (and some states have no income tax at all.)
Just eight states have no income tax – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. Another state – New Hampshire – doesn’t tax earned income but does tax investment income, including dividends.
Capital gains come due for anyone who makes a profit from selling assets such as stocks, real estate or other investments. You can reduce these taxes by holding onto assets for longer periods, utilizing tax-advantaged retirement accounts and strategically timing sales. With the right strategies, you can minimize the impact of capital gains taxes and continue to grow your wealth.