Capital Gains Tax: Meaning, Rates and Calculator - NerdWallet (2024)

If you're thinking of diving into investing or selling a stock, it's important to get acquainted with the term "capital gains tax" before you begin.

The profit you make from the sale of capital assets, such as stock, houses, cars or other types of investments, is considered income in the eyes of the IRS. How it gets taxed — and at what rate — depends on a few factors, including your income.

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What is capital gains tax?

A capital gains tax is a tax on the profit from the sale of an asset. How the capital gain is taxed depends on filing status, taxable income and how long the asset was owned before selling.

The capital gains tax rate is 0%, 15% or 20% on most assets held for longer than a year. Capital gains taxes on assets held for a year or less correspond to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

Capital gains taxes apply to the sale of capital assets for profit. This can include investments such as stocks, bonds, cryptocurrency, real estate, cars, boats and other tangible items.

How does capital gains tax work?

Capital gains taxes are progressive, similar to income taxes. When you sell an investment, that profit is considered taxable income. The holding period — the time between when you bought the asset and when you sold it — determines how the profit gets classified for tax purposes.

Profits made on assets held for a year or less before sale are considered short-term capital gains. Profits made on assets held for longer than a year are long-term capital gains.

Long-term capital gains tax

A long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is 0%, 15% or 20%. The rate depends on your taxable income and filing status, but the IRS says most people pay no more than 15% on their long-term capital gains.

Long-term capital gains tax rates are generally lower than short-term capital gains tax rates.

Short-term capital gains tax

A short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less. Short-term capital gains are added to income and taxed at your ordinary income tax rates.

Capital gains tax rate 2023

2023 long-term capital gains tax rates and brackets

These capital gains tax rates apply to assets sold for a profit in 2023. Capital gains are reported on Schedule D, which is submitted with your federal tax return (Form 1040) by April 15, 2024, or Oct. 15, 2024, with an extension.

The table above provides an overview of the tax rates that apply to long-term gains based on taxable income.

» Looking for a way to defer capital gains taxes? Putting money in an IRA or a 401(k) could help postpone or even avoid future capital gains tax bills.

2023 capital gains tax calculator

Use this capital gains calculator to estimate your taxes on assets sold in 2023.

Capital gains tax rate 2024

2024 long-term capital gains tax rates and brackets

These capital gains tax rates apply to assets sold for a profit in 2024. Capital gains are reported on Schedule D, which will be due with your federal tax return (Form 1040) by the April 2025 tax filing deadline, or by October 2025 with an extension. The table above provides an overview of the tax rates that apply to long-term gains based on taxable income.

Capital gains tax rules and considerations

Here are some other notable rules and exceptions that come into play.

Collectible assets

The capital gains tax rates in the tables above apply to most assets, but there are some noteworthy exceptions. Long-term capital gains on so-called “collectible assets” can be taxed at a maximum of 28%. This includes items such as coins, precious metals, antiques and fine art. Short-term gains on such assets are taxed at the ordinary income tax rate.

» Traded cryptocurrency last year? Other rules for crypto taxes

The net investment income tax

Some investors may owe an additional 3.8% of either your net investment income or the amount by which your modified adjusted gross income exceeds the amounts listed below — whichever is smaller.

» Having trouble deciding whether and when to sell? A qualified financial advisor can help you understand your options.

How to avoid, reduce or minimize capital gains taxes

1. Hold on

Whenever possible, hold an asset for a year or longer so you can qualify for the long-term capital gains tax rate, since it's significantly lower than the short-term capital gains rate for most assets. Our capital gains tax calculator shows how much that could save.

» Dive deeper: Read more about taxes on stocks, and how to pay less.

2. Use tax-advantaged accounts

These include 401(k) plans, individual retirement accounts and 529 college savings accounts, in which the investments grow tax-free or tax-deferred. That means you don’t have to pay capital gains tax if you sell investments within these accounts. Roth IRAs and 529 accounts in particular have big tax advantages. Qualified distributions from those are tax-free; in other words, you don’t pay any taxes on investment earnings. With traditional IRAs and 401(k)s, you’ll pay taxes when you take distributions from the accounts in retirement.

3. Rebalance with dividends

Rather than reinvest dividends in the investment that paid them, rebalance by putting that money into your underperforming investments. Typically, you'd rebalance by selling securities that are doing well and putting that money into those that are underperforming. But using dividends to invest in underperforming assets will allow you to avoid selling strong performers — and thus avoid capital gains that would come from that sale.

4. Exclude home sales

To qualify, you must have owned your home and used it as your main residence for at least two years in the five-year period before you sell it. You also must not have excluded another home from capital gains in the two-year period before the home sale. If you meet those rules, you can exclude up to $250,000 in gains from a home sale if you’re single and up to $500,000 if you’re married filing jointly.

5. Carry losses over

The IRS taxes your net capital gain, which is simply your total capital gains (investments sold for a profit) minus your total capital losses (investments sold at a loss). The IRS lets you use investment capital losses to offset gains. For example, if you sold a stock for a $10,000 profit this year and sold another at a $4,000 loss, you’ll be taxed on capital gains of $6,000.

If your net capital loss exceeds your net capital gains, you can offset your ordinary income by up to $3,000 ($1,500 for those married filing separately). Any additional losses can be carried forward to future years to offset capital gains or up to $3,000 of ordinary income per year.

6. Consider a robo-advisor

Robo-advisors manage your investments for you automatically, and they often employ smart tax strategies, including tax-loss harvesting, which involves selling losing investments to offset the gains from winners.» Ready to get started? See our picks for best robo-advisors