What Is Long-Term Capital Gains Tax?
Long-term capital gains tax is the amount of money assessed on gains you reap when you sell an asset you have held for more than a year.
In the U.S., the federal and state governments tax different kinds of income in different ways. The money you make at work, for instance, is taxed at income tax rates. The money you make from investing is taxed at capital gains rates. How much capital gains you pay depends on how long you’ve held the investment, your income, and your filing status. With long-term capital gains tax, you’ll pay a 0%, 15%, or 20% tax.
Key Points
• Long-term capital gains tax applies to assets held over a year.
• Rates of long-term capital gains tax are 0%, 15%, or 20%, depending on income and filing status.
• Holding investments longer, using tax-advantaged accounts, and tax-loss harvesting may reduce capital gains tax liability.
• On the sale of a primary residence, there is an exclusion from capital gains tax of up to $250,000 (for single filers) or $500,000 (for married filers).
• State capital gains taxes may apply, varying by state.
What Is Capital Gains Tax?
Whether you’re filing taxes for the first time or have been doing so for years, capital gains tax might still be new to you. Here’s a quick primer.
• Capital gains tax is a type of tax designed primarily as a way for governments to generate revenue by taxing the money you make when you invest.
• These fees are taxes on investment income, which helps create a comprehensive tax system in which wealth generated through investing is taxed in addition to wealth generated by labor.
Capital gains tax may also be seen as a mechanism that promotes wealth equality because wealthy individuals often accrue more investment returns.
Recommended: What Is Income Tax Withholding and How Does It Work?
What’s Considered a Capital Gain?
A capital gain occurs when you buy an investment and sell it for more than you paid for it. The gain is the difference between the purchase price and the sale price. For example, if you buy a stock for $30 and sell it for $50, you’ve generated a capital gain of $20. You’ll only owe taxes on this gain.
You can also have a capital loss. Say you buy another stock for $30 and sell it for $15. In this case, you’ve generated a loss of $15, which is not subject to tax at all. In fact, you can use capital losses to offset your gains. Offset your $20 gain from the example above with your $15 loss, and you’ll have a net gain of $5. You may only owe taxes on that amount.
There are several common assets that may be subject to capital gains taxes including:
• Stocks, bonds, and index funds
• Commodities
• Real estate investments (though you may qualify for certain exemptions on the sale of your primary residence.)
• Business interests
• Collectibles
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Short-Term vs. Long-Term Capital Gains
There are two types of capital gains: short-term and long-term gains. You owe short-term capital gains tax on investments you’ve held for one year or less and sold for a profit. Short-term capital gains are taxed at the same rates as your ordinary income based on your tax bracket.
Depending on how much money you make (say, considerably more than the average salary in the U.S.), these rates can be relatively high.
You owe long-term capital gains tax on the profit you’ve made from the sale of investments you’ve owned for a year or more. The government taxes these at a preferential rate to encourage long-term investing.
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What Is the Long-Term Capital Gains Tax Rate?
The long-term capital gains tax rate is 0%, 15%, or 20%, and it depends on your income and your filing status. The following rates are for long-term capital gains made in 2024.
2024 Long-Term Capital Gains Rate
Tax Rate | Single | Married filing jointly and qualifying surviving spouse | Married Filing Separately | Head of Household |
---|---|---|---|---|
0% | $0 to $47,025 | $0 to $94,050 | $0 to $47,025 | $0 to $63,000 |
15% | $47,026 to $518,900 | $94,051 to $583,750 | $47,026 to $291,850 | $63,001 to $551,350 |
20% | $518,901 or more | $583,751 or more | $291,851 or more | $551,351 or more |
Worth noting: The long-term capital gains tax 2025 shares the same rates, but the qualifying incomes in the brackets are slightly higher to reflect the impact of inflation.
2025 Long-Term Capital Gains Rate
Tax Rate | Single | Married filing jointly and qualifying surviving spouse | Married Filing Separately | Head of Household |
---|---|---|---|---|
0% | $0 to $48,350 | $0 to $96,700 | $0 to $48,350 | $0 to $64,750 |
15% | $48,351 to $533,400 | $96,701 to $600,050 | $48,350 to $300,000 | $64,751 to $566,700 |
20% | $533,401 or more | $600,051 or more | $300,001 or more | $566,701 or more |
How Capital Gains Taxes Work
To better understand how tax on long-term capital gains works, here’s an example:
• Say you bought $5,000 worth of shares in a mutual fund.
• You sell them 10 years later for $10,000, which means you have a $5,000 taxable gain.
• If you make $70,000 per year and file a single tax return, your long-term capital gains tax rate will be 15%.
• That means you’ll owe 0.15 x $5,000, or $750 in long-term capital gains tax on the amount your fund rose in value during the time you held it.
By knowing the amount you’ll need to pay, you can better prepare for and track your budget and outflow of funds at tax time.
Recommended: How Much Do You Have to Make to File Taxes?
Capital Gains Tax Strategies
There are several ways you can reduce capital gains taxes or otherwise use them to your advantage.
• Hold your investments as long as you can: Hang on to investments for more than a year whenever possible to qualify for preferential long-term rates.
• Use tax-advantaged accounts: When you can, invest inside of tax-advantaged accounts, such as 401(k)s and traditional and Roth IRAs. Money inside these accounts grows tax-deferred or tax-free. That means you don’t have to pay any capital gains when you sell investments in the account.
With 401(k)s and traditional IRAs, you’ll pay income tax on the withdrawals you make in retirement. But with Roth accounts, your withdrawals are tax-free.
• Take advantage of the home exclusion: If you’re selling your primary residence at a profit, you may qualify to exclude up to $250,000 in capital gains if you’re a single filer, and $500,000 if you’re married and filing jointly. In general, to be eligible for this exclusion, you must have owned and used your home as your primary residence for a period that totals at least two years out of the five years prior to that date on which you sell the home.
• Consider tax-loss harvesting: You’ve already learned that you can use capital losses to offset capital gains. Doing so strategically is known as tax-loss harvesting, and it may be a strategy worth considering as you prepare for tax season.
For example, you may sell certain investments at a loss when you know you are going to incur a large capital gains tax bill. Also, if your capital losses are greater than your gain, you may be able to offset up to $3,000 worth of income. If you’re unable to use your losses in a given year, you can roll them over to the next.
Strategies like tax-loss harvesting can be complicated, and it may be worth speaking with a tax professional to avoid making any tax filing mistakes.
Do You Pay State Taxes on Capital Gains?
In addition to federal capital gains tax, you may owe state tax as well. Not all states charge capital gains, but many (currently more than 40) do. Visit your state government website to find out if yours is one of those that does and what the current rates are.
The Takeaway
When you sell an investment you’ve held for more than a year, you may owe long-term capital gains tax. The rate you pay can vary with filing status and income, ranging from 0% to 15% to 20%. With a deeper understanding of how these taxes work, you can appropriately pay these taxes and possibly offset some of the amount. This can help you manage your money more effectively.
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FAQ
How much tax do I pay on long-term capital gains?
Depending on your income and filing status, you’ll pay 0%, 15%, or 20% in federal long-term capital gains taxes. You may also owe state capital gains taxes, depending on where you live.
What qualifies as long-term capital gains?
Long-term gains are money you have made from the sale of assets you’ve owned for longer than a year. It may apply to investments, real estate, and collectibles, among other assets.
How do I avoid paying capital gains tax?
You don’t have to pay capital gains taxes on the sale of investments inside of tax-advantaged accounts, such as 401(k)s and IRAs. You may also avoid paying capital gains tax if you offset your gains with capital losses.
What is a long-term capital gain example?
An example of a long-term capital gain might be the sale of a rental property that an investor has owned for 10 years. Say that investor bought the property for $200,000 and sold it for $325,000. That investment would have a capital gain of $125,000. Because the asset was held for more than a year, it qualifies as a long-term gain.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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