The U.S. capital gains tax is a tax on the profit made from the sale of a capital asset, such as stocks, real estate, bonds, or other investments. You pay capital gains tax only when the asset is sold and the gain is “realized.”

Types of Capital Gains

Capital gains are categorized based on how long you held the asset before selling:

1. Short-Term Capital Gains
   • Applies to assets held one year or less
   • Taxed at ordinary income tax rates (10% to 37% depending on your income)
2. Long-Term Capital Gains
   • Applies to assets held more than one year
   • Taxed at preferential rates: 0%, 15%, or 20%, based on taxable income

For 2024, the 15% rate applies to most individuals with income between approximately $47,025 and $518,900 (single filers).

Capital Gains on Real Estate

• Homeowners can exclude up to $250,000 ($500,000 for married couples) in capital gains when selling a primary residence, if certain conditions are met.
• Investment property is not eligible for this exclusion.

Capital Losses

If you sell an asset for less than you paid, it results in a capital loss, which can offset capital gains and reduce taxable income. You can deduct up to $3,000 in net losses per year against other income.

Net Investment Income Tax

High earners may also pay an additional 3.8% tax on net investment income, including capital gains.

Summary: Capital gains tax encourages long-term investing by offering lower tax rates for assets held over a year. Understanding the holding period, income thresholds, and available exclusions is key to minimizing your tax liability.

Understanding U.S. Capital Gains Tax

The capital gains tax is a levy imposed on the profit you make from selling an asset at a higher price than what you originally paid. It’s a cornerstone of the U.S. tax system, affecting millions of individuals and businesses who invest in stocks, real estate, bonds, businesses, and other capital assets.

Capital gains taxes not only generate revenue for the federal government, but also shape investment behavior. Understanding how this tax works can help individuals minimize their tax liability while making smarter financial decisions.

What Is a Capital Gain?

A capital gain arises when you sell a capital asset for more than your purchase price (also known as your “basis”). The difference between the sale price and your basis is your capital gain.

• If you buy stock for $10,000 and sell it later for $15,000, your capital gain is $5,000.
• Conversely, if you sell it for $7,000, you incur a capital loss of $3,000.

You are only taxed on the realized gain—meaning you must have sold the asset. Unrealized gains (such as rising stock prices you haven’t cashed out on) are not taxed.

Types of Capital Gains: Short-Term vs. Long-Term

Capital gains in the U.S. are categorized based on the length of time you hold the asset before selling:

1. Short-Term Capital Gains

• Applies to assets held one year or less
• Taxed at ordinary income tax rates, which in 2025 range from 10% to 37%
• No special tax breaks apply to short-term gains

2. Long-Term Capital Gains

• Applies to assets held more than one year
• Taxed at preferential rates: 0%, 15%, or 20%, depending on your taxable income
• Designed to encourage long-term investment

Capital Gains Tax Rates (2025)

Here’s how long-term capital gains are taxed based on income:

(Note: Thresholds are adjusted annually for inflation.)

If your income falls within the 0% bracket, you can sell long-held assets without owing federal capital gains tax.

Net Investment Income Tax (NIIT)

High-income earners may owe an additional 3.8% tax on capital gains under the Net Investment Income Tax (NIIT).

• Applies to individuals with modified adjusted gross income (MAGI) above:
  • $200,000 (single)
  • $250,000 (married filing jointly)
  • $125,000 (married filing separately)

This tax applies to investment income, including capital gains, dividends, interest, rental income, and royalties.

Capital Gains on Real Estate

Special rules apply to capital gains from selling your home:

Primary Residence Exclusion

• You can exclude up to $250,000 (single) or $500,000 (married filing jointly) in gains on the sale of your primary residence if:
  • You owned and lived in the home for at least two of the last five years
  • You haven’t claimed the exclusion on another home in the past two years

If you sell for a profit exceeding the exclusion amount, the excess is taxed as a capital gain.

Investment Property

• No exclusion available
• Subject to depreciation recapture and capital gains tax

Capital Losses and Offsetting Gains

You can use capital losses to offset capital gains and reduce your tax bill:

• Short-term losses offset short-term gains first
• Long-term losses offset long-term gains
• Net losses can offset up to $3,000 of ordinary income per year ($1,500 if married filing separately)
• Unused losses carry forward indefinitely

This makes loss harvesting—strategically selling losing investments—a popular tax strategy.

Basis and Adjustments

Your basis is generally what you paid for the asset, including transaction costs. However, certain factors can affect your basis:

• Improvements to real estate increase basis
• Depreciation deductions (e.g., rental property) reduce basis
• Inherited assets get a “step-up” in basis to the market value at the date of death, minimizing capital gains for heirs

Capital Gains in Retirement Accounts

Investments held in tax-advantaged accounts (e.g., 401(k)s, IRAs) are not subject to capital gains tax when bought and sold within the account.

• Traditional IRA/401(k): Withdrawals taxed as ordinary income
• Roth IRA: Withdrawals (including gains) may be tax-free after age 59½ and meeting holding requirements

Capital Gains for Businesses and Collectibles

Collectibles

• Items like art, antiques, coins, and precious metals are taxed at a maximum 28% rate, not the regular 15%/20% long-term capital gains rates

Qualified Small Business Stock (QSBS)

• Certain small business investments (held for 5+ years) may be partially or fully exempt from capital gains tax under Section 1202 of the Internal Revenue Code

Capital Gains Tax Planning Strategies

1. Hold Assets Longer

• Holding an asset over one year qualifies for long-term rates

2. Harvest Losses

• Offset gains by selling underperforming assets

3. Tax-Loss Harvesting

• Sell losing assets and reinvest in similar (but not “substantially identical”) investments to avoid wash-sale rules

4. Gifting Appreciated Assets

• Give assets to lower-income family members who may pay 0% capital gains tax
• Or donate to charities for a charitable deduction and avoid the gain entirely

5. Use Tax-Deferred Accounts

• IRAs, 401(k)s, HSAs, and 529 plans allow tax-deferred or tax-free growth

6. Installment Sales

• Spread gain over several years to stay in lower tax brackets

7. Opportunity Zones

• Invest capital gains in Qualified Opportunity Funds to defer or reduce taxes

Capital Gains and State Taxes

In addition to federal tax, most states also tax capital gains, generally at ordinary income tax rates.

• California, New York, and Oregon have high capital gains tax rates
• Nine states (like Florida, Texas, and Washington) have no state income tax, and thus no state capital gains tax

Proposed Reforms and Political Debate

Capital gains taxes have been a frequent subject of political debate. Proposals have included:

• Equalizing capital gains and income tax rates
• Raising the 20% top rate
• Taxing unrealized gains annually (mark-to-market)
• Eliminating the step-up in basis at death

Proponents argue that higher rates would reduce inequality and increase revenue. Opponents argue that it could discourage investment and harm retirement savings.

Conclusion

The U.S. capital gains tax system is multifaceted, affecting nearly every investor or asset owner at some point. It rewards long-term investing, penalizes short-term speculation, and offers numerous opportunities for tax planning and wealth transfer.

To make the most of your investment gains, it’s crucial to understand:

• The difference between short- and long-term capital gains
• Applicable tax rates
• Special exemptions (especially for homes and retirement accounts)
• Smart timing and structuring of asset sales

Whether you’re planning for retirement, selling property, or managing a portfolio, effective capital gains planning can significantly reduce your tax bill and increase your net wealth.