Capital Gains Tax: Rates, Rules & Strategies

Learn the difference between short-term and long-term capital gains, current tax rates, and smart strategies to reduce taxes on your investments.

Capital gains tax is levied on the profit you make when you sell an asset for more than you paid for it. This applies to stocks, bonds, mutual funds, real estate, cryptocurrency, collectibles, and other investment assets. The tax rate you pay depends on how long you held the asset before selling it, with a critical dividing line at one year of ownership.

Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income tax rate, which can be as high as 37%. Long-term capital gains apply to assets held for more than one year and receive preferential tax treatment with rates of 0%, 15%, or 20% depending on your taxable income. This significant difference in rates makes holding period planning one of the most important tax strategies for investors.

Capital losses can be used to offset capital gains, reducing your tax liability. If your losses exceed your gains, you can deduct up to $3,000 of net capital losses against ordinary income per year, with any remaining losses carried forward to future years. Understanding how capital gains taxation works is essential for making informed investment decisions.

How It Works

When you sell an asset, you calculate your capital gain or loss by subtracting your cost basis from the sale price. Your cost basis is generally what you paid for the asset, including commissions and fees, adjusted for events like stock splits, reinvested dividends, or improvements to real estate. The resulting gain or loss is either short-term or long-term based on your holding period.

All capital gains and losses are reported on Schedule D of Form 1040, with detailed transaction information on Form 8949. Your broker provides Form 1099-B with cost basis and sales information for securities transactions. Short-term and long-term gains are calculated separately, and losses in one category offset gains in the same category first before being applied to the other.

High-income taxpayers face an additional 3.8% Net Investment Income Tax (NIIT) on capital gains if their modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). This effectively raises the top long-term capital gains rate to 23.8% for high earners. Certain assets like collectibles are taxed at a maximum rate of 28%, and depreciation recapture on real estate is taxed at 25%.

Current Rates

Bracket / Category	Rate	Applies To
$0 - $48,350 (Single)	0%	Long-term capital gains (2025)
$48,351 - $533,400 (Single)	15%	Long-term capital gains (2025)
Over $533,400 (Single)	20%	Long-term capital gains (2025)
Assets held 1 year or less	10% - 37%	Short-term gains taxed as ordinary income
Collectibles (art, coins, etc.)	28% max	Long-term gains on collectibles
Net Investment Income Tax	3.8%	MAGI over $200K (single) / $250K (MFJ)

Key Forms

Schedule D (Form 1040)

Report capital gains and losses summary

Form 8949

Report individual sales and dispositions of capital assets

Form 1099-B

Broker statement of proceeds from securities transactions

Form 8960

Calculate Net Investment Income Tax (3.8% surtax)

Form 2439

Report undistributed long-term capital gains from mutual funds

Deductions & Credits

Capital Loss Deduction

Offset capital gains with capital losses. Deduct up to $3,000 in net capital losses against ordinary income per year, carry forward excess losses indefinitely.

Section 1202 Exclusion (QSBS)

Exclude up to 100% of gain (up to $10 million) on Qualified Small Business Stock held more than 5 years from eligible C corporations.

Opportunity Zone Deferral

Defer and potentially reduce capital gains tax by investing gains into Qualified Opportunity Zone Funds within 180 days of the sale.

Primary Residence Exclusion

Exclude up to $250,000 ($500,000 MFJ) in capital gains from the sale of your primary residence if you owned and lived in it for 2 of the last 5 years.

1031 Like-Kind Exchange

Defer capital gains tax on investment real estate by reinvesting proceeds into a similar property within strict time limits (45-day identification, 180-day closing).

Filing Tips

Hold investments for at least one year and one day to qualify for the lower long-term capital gains rates.
Use tax-loss harvesting to sell losing investments and offset gains, being mindful of the 30-day wash sale rule.
Consider donating appreciated assets to charity to avoid capital gains tax entirely while claiming a deduction for the full market value.
Place investments that generate short-term gains or ordinary income in tax-advantaged accounts (IRA, 401k) when possible.
Track your cost basis carefully, especially for assets acquired through multiple purchases, gifts, or inheritance.
Plan the timing of asset sales across tax years to manage your bracket and avoid triggering the 3.8% NIIT.

Frequently Asked Questions

What is the difference between short-term and long-term capital gains?

Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income tax rate (up to 37%). Long-term capital gains apply to assets held for more than one year and are taxed at preferential rates of 0%, 15%, or 20% depending on your income level.

Do I pay capital gains tax on cryptocurrency?

Yes. The IRS treats cryptocurrency as property, not currency. Every sale, trade, or exchange of crypto is a taxable event. If you held the crypto for more than one year, long-term rates apply. Using crypto to purchase goods or services also triggers a capital gain or loss based on the difference between your cost basis and the fair market value at the time of the transaction.

How does the wash sale rule work?

The wash sale rule prevents you from claiming a tax loss if you buy a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the replacement security. This rule applies to stocks, bonds, mutual funds, and options but currently does not apply to cryptocurrency.

Can I avoid capital gains tax when selling my home?

If you owned and used the home as your primary residence for at least 2 of the 5 years before the sale, you can exclude up to $250,000 of gain (single) or $500,000 (married filing jointly). Gains above these thresholds are taxable. This exclusion can be used repeatedly, but not more than once every two years.

What happens to capital gains when someone dies?

Inherited assets receive a stepped-up cost basis equal to the fair market value at the date of death. This means any unrealized gains during the decedent lifetime are permanently eliminated for income tax purposes. This is one of the most significant tax benefits in the code and is a key consideration in estate planning.

Related Tax Guides

Federal Income Tax Estate & Gift Tax Alternative Minimum Tax Self-Employment Tax

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