The capital gains tax rate that applies to profits from the sale of stocks, mutual funds or other capital assets held for more than one year (i.e., for long-term capital gains) is either 0%, 15% or 20%. However, which one of those long-term capital gains rates applies to you depends on your taxable income. The higher your income, the higher the rate.
But what if you held the asset for one year or less (i.e., a short-term capital gain)? In that case, you're looking at different tax rates applicable to the gain. Plus, the type of property sold can impact the capital gains tax rate. Did you know that some people have to pay an extra surtax on top of the capital gains tax? It can all be very confusing.
So, don't run out and immediately spend all your earnings if you're lucky enough to score big on a hot stock tip. Instead, figure out how much you should stash away for tax time (or for an estimated tax payment).
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As described in detail below, various factors go into determining the capital gains tax rate that applies and whether the surtax is owed.
Long-term capital gains tax rates
To encourage long-term investments, lower tax rates apply to capital gains from the sale of assets held for more than a year (again, either 0%, 15%, or 20%). You may qualify for the 0% rate if your income is low enough.
On the other hand, wealthier taxpayers will likely pay tax on long-term capital gains at the 20% rate, but that's still going to be less than the tax rate they pay on other income like wages or short-term capital gains.
So, where do you stand when it comes to the tax rate on long-term capital gains? It all comes down to your taxable income. Here are the long-term capital gains taxable income thresholds for the 2023 tax year:
2023 Long-Term Capital Gains Tax Rate Thresholds
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| Capital Gains Tax Rate | Taxable Income (Single) | Taxable Income(Married Filing Separate) | Taxable Income (Head of Household) | Taxable Income(Married Filing Jointly) |
| 0% | Up to $44,625 | Up to $44,625 | Up to $59,750 | Up to $89,250 |
| 15% | $44,626 to $492,300 | $44,626 to $276,900 | $59,751 to $523,050 | $89,251 to $553,850 |
| 20% | Over $492,300 | Over $276,900 | Over $523,050 | Over $553,850 |
The income thresholds for the long-term capital gains tax rates are adjusted each year for inflation. The IRS has already released the 2024 thresholds, so you can start planning for 2024 capital asset sales now.
However, that's a good thing for taxpayers, especially for people with a stagnate income or an income that grows slower than the rate of inflation. Without an adjustment to match the rise in inflation, more people would end up paying a higher rate in 2024 than they did in 2023.
To see how all the taxable income thresholds changed from 2023 to 2024, here are the figures for the 2024 tax year (that you'll use for returns filed in early 2025).
2024 Long-Term Capital Gains Tax Rate Income Thresholds
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| Capital Gains Tax Rate | Taxable Income (Single) | Taxable Income(Married Filing Separate) | Taxable Income(Head of Household) | Taxable Income (Married Filing Jointly) |
| 0% | Up to $47,025 | Up to $47,025 | Up to $63,000 | Up to $94,050 |
| 15% | $47,026 to $518,900 | $47,026 to $291,850 | $63,001 to $551,350 | $94,o51 to $583,750 |
| 20% | Over $518,900 | Over $291,850 | Over $551,350 | Over $583,750 |
Short-term capital gains tax rates
The tax rate on short-term capital gains (i.e., from the sale of assets held for one year or less) is the same as the rate you pay on wages and other "ordinary" income. Those rates currently range from 10% to 37%, depending on your taxable income.
The income thresholds for each tax rate are also adjusted annually for inflation. For the ordinary tax rate that applies to you, see 2023 Federal Income Tax Brackets and Rates.
Generally, the rate you pay for long-term capital gains is less than the rate you pay for short-term gains. So, in most cases, you can save on taxes by holding capital assets like stocks, bonds, and real estate for more than one year before selling.
Capital gains tax rate for collectibles
There are a few exceptions to the general capital gains tax rates. Perhaps the most common exception involves gains from the sale of collectibles that qualify as capital assets.
For this special rule, a "collectible" can be a work of art, antiques, stamp, coin, bottle of wine or other alcoholic beverage, gold or other precious metal, gem, historic object, or another similar item. If you sell an interest in a partnership, S corporation, or trust, any gain from that sale attributable to the unrealized appreciation in the value of collectibles is also treated as gain from the sale of collectibles.
Instead of a 20% maximum tax rate, long-term gains from the sale of collectibles can be hit with a capital gains tax as high as 28%. If your ordinary tax rate is lower than 28%, then that rate will apply. But if you're in a higher tax bracket (i.e., 32%, 35% or 37%), then the capital gains tax on your collectible gains is capped at 28%.
The 28% limit doesn't apply to short-term capital gains. So, if you don't own a collectible for at least one year before selling it, you'll still be taxed on any gain at your ordinary tax rate (between 10% and 37%).
Capital gains tax rate for Qualified Small Business Stock
If you sell "qualified small business stock" (QSBS) that you held for at least five years, some or all of your gain may be tax-free. However, for any gain that is not exempt from tax, a maximum capital gains tax rate of 28% applies.
As with the 28% rate for collectibles, if your ordinary tax rate is below 28%, then that rate will apply to taxable QSBS gain. The 28% rate doesn't apply to short-term capital gains from the sale of QSBS.
Capital gains tax rate for previously deducted depreciation
If you sell real estate for which you previously claimed a depreciation deduction, you may have to pay a capital gains tax of up to 25% on any unrecaptured depreciation. The taxable amount is known as "unrecaptured Section 1250 gain" (named after the tax code section covering gain from the sale or other disposition of certain depreciable real property). The rest of your long-term gain is taxed at either the 0%, 15% or 20% rate. For most people, this only comes up if you sell rental property.
Once again, the 25% rate is a maximum rate. So, if your ordinary income tax rate is lower, you won't have to pay that much. Instead, your ordinary tax rate will apply. Also, the rate doesn't apply to short-term gains.
Net Investment Income Tax
There's an additional 3.8% surtax on net investment income (NII) that you might have to pay on top of the capital gains tax. (NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities, and royalties.)
You must pay the surtax if you're a single or head-of-household taxpayer with modified adjusted gross income (AGI) over $200,000, a married couple filing a joint return with modified AGI over $250,000, or a married person filing a separate return with modified AGI over $125,000. Use Form 8960 to calculate the surtax.
Related
- Capital Gains Tax 101
- The Wash Sale Rule: 5 Things to Know
- Capital Gains Tax on Real Estate and Home Sales
- Capital Gains Tax Exclusion for Homeowners: What to Know
