When you sell an investment, a piece of real estate, or another asset for more than you paid, the profit is a capital gain — and it is taxable. How much you pay depends on how long you held the asset and how much income you have overall. Understanding the rules can meaningfully affect what you keep from a sale.
Short-Term vs. Long-Term Capital Gains
The holding period is the first thing that determines how a capital gain is taxed. Assets held for one year or less produce a short-term capital gain, which is taxed at ordinary income tax rates — the same rate as your wages. Assets held for more than one year produce a long-term capital gain, which is taxed at preferential rates that are significantly lower.
Short-Term Rates
Taxed at your ordinary income tax rate: 10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on your total income and filing status. If you are in the 22% bracket, a short-term gain is taxed at 22%. There is no separate “short-term capital gains rate” — it flows into your regular income.
Long-Term Rates
For 2024, the long-term capital gains rates are 0%, 15%, or 20%, depending on your taxable income. Most middle-income taxpayers pay 15%. The 0% rate applies to single filers with taxable income up to $47,025 and married filing jointly up to $94,050 — meaning some retirees with modest income owe no tax on long-term gains at all.
What Counts as a Capital Gain
Capital gains can come from selling stocks, bonds, mutual funds, ETFs, real estate, cryptocurrency, collectibles, and other assets. The gain is calculated as the sale price minus your cost basis — generally what you paid for the asset, plus any improvements or transaction costs.
If you sell at a loss, you have a capital loss, which can offset capital gains. If your capital losses exceed your gains in a given year, you can deduct up to $3,000 of the net loss against ordinary income. Any remaining loss carries forward to future years.
Capital Gains on Your Home
Most homeowners who sell their primary residence qualify for an exclusion that eliminates a substantial portion of the gain from taxation. Single filers can exclude up to $250,000 of gain; married couples filing jointly can exclude up to $500,000. To qualify, you must have owned and lived in the home for at least two of the five years before the sale.
Any gain above the exclusion amount is taxable as a long-term capital gain (assuming you owned the home for more than a year). For example, a married couple who bought a home for $300,000 and sold it for $900,000 has a $600,000 gain — $500,000 is excluded, and $100,000 is taxable at long-term rates.
Net Investment Income Tax
Higher-income taxpayers face an additional 3.8% Net Investment Income Tax (NIIT) on capital gains and other investment income. This applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). For those who fall above these thresholds, the effective long-term capital gains rate is 18.8% or 23.8% rather than 15% or 20%.
Practical Strategies
Hold Assets Over a Year
The simplest way to reduce capital gains taxes is to hold assets for more than one year before selling. The difference between short-term and long-term rates can be substantial — for someone in the 22% income bracket, a long-term gain is taxed at 15% instead, a 7-point difference that adds up on large gains.
Use Tax-Advantaged Accounts
Investments held inside a 401(k), traditional IRA, or Roth IRA do not generate capital gains taxes when sold within the account. Growth in a Roth IRA is not taxed at all on qualified withdrawals. Placing high-growth or frequently traded investments inside tax-advantaged accounts can significantly reduce your lifetime capital gains tax burden.
Tax-Loss Harvesting
If you have investments that have declined in value, selling them to realize a loss can offset gains elsewhere in your portfolio. This strategy — called tax-loss harvesting — is most effective in taxable brokerage accounts. Be aware of the wash-sale rule: you cannot repurchase the same or a substantially identical security within 30 days before or after the sale and still claim the loss.
Capital Gains in Retirement
Retirement can be a particularly favorable time to realize capital gains if your taxable income is lower than it was during working years. A retiree with Social Security income and modest IRA withdrawals may fall in the 0% long-term capital gains bracket — meaning they can sell appreciated investments with no federal tax on the gain. This is sometimes called “filling up the bracket” and is a legitimate tax planning strategy worth discussing with a financial advisor.
Capital gains tax rates and thresholds are subject to change. Figures here reflect 2024 tax year rules. Consult a tax professional before making investment or real estate decisions based on tax considerations.