# Capital Gains Tax: What It Is, How It Works, and Current Rates

Discover what happens to your investment profits

A capital gains tax is imposed on the sale of an asset. The long-term capital gains tax rates for the 2025 tax year are 0%, 15%, or 20% of the profit, depending on the income of the filer.  

### Key Takeaways

*   Capital gains taxes are due when an investment is sold.
*   Capital gains taxes apply to capital assets that include stocks, bonds, digital assets like cryptocurrencies and NFTs, jewelry, coin collections, and real estate.
*   Long-term gains are levied on profits of investments held for more than a year.
*   Short-term gains are taxed on investments that are held for one year or less.
*   Short-term gains are taxed at an individual's regular income tax rate which is typically higher than the tax on long-term gains.

![Capital Gains Tax Definition](https://www.investopedia.com/thmb/UI6A79KPsxlzUrWWWOL_qH92Gts=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/capital_gains_tax.asp-Final-2add8822d04c4ea694805059d2a76b19.png)

*— Investopedia / Theresa Chiechi*

## What Is Capital Gains Tax? Understanding the Basics

Capital gains or profits are referred to as having been realized when stock shares or any other taxable investment assets are sold. The tax doesn't apply to unsold investments or unrealized capital gains. Stock shares won't incur taxes until they're sold, no matter how long they're held or how much they increase in value.

The capital gains tax rate applies only to profits from the sale of assets held for more than a year, which is referred to as [long-term capital gains](https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp). As of 2025, the current rates are 0%, 15%, or 20%, depending on the taxpayer's tax bracket for that year, although gains on collectibles are taxed at 28%.

Most taxpayers pay a higher rate on their income than on any long-term capital gains they may have realized. That gives them a financial incentive to hold investments for at least a year, after which the tax on the profit will be lower.

> **Important**
>
> Day traders and others taking advantage of the ease and speed of trading online should be aware that any profits they make from buying and selling assets held for less than a year aren't just taxed. They're taxed at a higher rate than assets that are held long-term.

An investor will owe long-term capital gains tax on the profits of any investment they've owned for more than one year. The [short-term capital gains](https://www.investopedia.com/terms/s/short-term-gain.asp) tax applies if the investor owns the investment for one year or less. The taxpayer's [ordinary income](https://www.investopedia.com/terms/o/ordinaryincome.asp) bracket determines the short-term rate. That's a higher tax rate than the capital gains rate for all but the highest-paid taxpayers.

## Capital Gains Tax Rates for 2025

The profit on an asset that's sold a year or less after its purchase is generally treated for tax purposes as if it were wages or salary. Such gains are added to your [earned income](https://www.investopedia.com/terms/e/earnedincome.asp) or ordinary income on your tax return.

The same generally applies to [dividends](https://www.investopedia.com/terms/d/dividend.asp) paid by an asset. They represent profit, although they aren't capital gains. Ordinary dividends are taxed as ordinary income for taxpayers in the 15% and higher tax brackets. Qualified dividends are subject to the 0%, 15%, or 20% capital gains tax.

However, a different system applies to long-term capital gains. The tax you pay on assets held for more than a year and sold at a profit varies according to a rate schedule based on the taxpayer's taxable income. The rates are adjusted annually for [inflation](https://www.investopedia.com/terms/i/inflation.asp).

The rates for tax year 2025 are shown in this table.

## Capital Gains Tax Exceptions: Collectibles, Real Estate, & Investments

Some categories of assets are subject to different capital gains tax treatment than the norm.

### Collectibles

Short-term gains on [collectibles,](https://www.investopedia.com/articles/personal-finance/061715/how-are-collectibles-taxed.asp) including art, antiques, jewelry, precious metals, and stamp collections, are taxed as ordinary income at graduated tax rates. Net long-term gains on collectibles are taxed with a cap of 28%.

### Owner-occupied real estate

A different standard applies to real estate capital gains if you're selling your principal residence. $250,000 of an individual's [capital gains on the sale of a home](https://www.investopedia.com/ask/answers/07/taxtiphome.asp) are excluded from taxable income. This increases to $500,000 for those who are married and filing jointly. The seller must have owned and lived in the home for two years or more during the five years ending on the date of the sale to qualify for this tax break.

Capital losses from the sale of [personal property,](https://www.investopedia.com/terms/p/personalproperty.asp) such as a home, aren't deductible from gains, however.

A single taxpayer who purchased a house for $200,000 and later sells it for $500,000 has made a $300,000 profit on the sale. This individual must report a capital gain of $50,000 after applying the $250,000 exemption. This is the amount subject to the capital gains tax.

> **Tip**
>
> The costs of significant repairs and improvements to the home can be added to its cost in most cases, reducing the amount of taxable capital gain.

### Investment real estate

Investors who own real estate can often claim depreciation deductions against income to reflect the steady deterioration of the property as it ages. This is a decline in the home's physical condition and is unrelated to its changing value in the real estate market.

The depreciation deduction effectively reduces the amount you have paid for the property. That can, in turn, increase your taxable capital gain if you sell because the gap between the property's value after deductions and its sale price will be greater.

If you paid $100,000 for the building, you'd be taxed as if you'd paid $95,000. You're permitted to claim $5,000 in depreciation, which is then treated as a recapture of those depreciation deductions at the time of sale.

The tax rate that applies to the recaptured amount is 25%, so there would be total capital gains of $15,000 if you then sold the building for $110,000. Then, $5,000 of the sale figure would be treated as a recapture of the deduction from income. That recaptured amount is taxed at 25%. The remaining $10,000 of capital gain would be taxed at 0%, 15%, or 20%, depending on the investor's income.

### Investment exceptions

You may be subject to the net investment income tax if you have a high income. This tax imposes an additional 3.8% on your investment income, including your capital gains, if your [modified adjusted gross income (MAGI)](https://www.investopedia.com/terms/m/magi.asp) exceeds certain maximums.

The threshold amount is $250,000 if you're married and filing jointly or you're a surviving spouse as of 2025. It's $200,000 if you’re single or a head of household and $125,000 if you're married and filing a separate return.

## Calculating Your Capital Gains

Capital losses can be deducted from capital gains to calculate your taxable gains for the year. The calculation becomes a little more complex, however, if you've incurred capital gains and capital losses on both short-term and long-term investments.

First, sort short-term gains and losses into a separate pile from long-term gains and losses. All short-term gains must be reconciled to yield a total short-term gain, and then the short-term losses are totaled. Finally, long-term gains and losses are tallied.

Short-term gains are netted against short-term losses to produce a net short-term gain or loss. The same is done with long-term gains and losses.

> **Tip**
>
> Many individuals calculate their tax obligations using software that automatically makes the computations. You can use a capital gains calculator to get a rough idea of what you may pay on a potential or actualized sale.

## How to Reduce Capital Gains Tax Legally

You'll owe capital gains tax on the profit if you want to invest money and make money. You can [minimize your capital gains taxes](https://www.investopedia.com/how-to-be-a-tax-efficient-investor-8414283) in several ways, however.  

*   Hold your investment for more than one year. Otherwise, the profit will be treated as regular income, and you'll most likely pay more.
*   Don't forget that your investment losses can be deducted from your investment profits. You can claim $3,000 in losses a year. Some investors use this benefit to good effect. They'll sell a loser at the end of the year, so they have losses to offset their gains for the year. You can carry the excess losses forward and deduct them from your capital gains in future years if your losses are greater than $3,000.
*   Keep track of any qualifying expenses you incur in making or maintaining your investment. These expenses will increase the cost basis of the investment and reduce its taxable profit.
*   Be mindful of [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) accounts. Holding securities in a 401(k) or IRA can limit the [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) you have in your investment and your options to withdraw funds. However, you may have greater capabilities in buying and selling securities without incurring taxes on gains.
*   Seek out exclusions. If you want to sell your house, ensure that you understand the rules that allow you to exclude a portion of gains from the sale. If possible, intentionally meet the criteria to plan the timing of the sale and ensure that you meet exclusion requirements.

> **Tip**
>
> Investopedia's Tax Savings Guide can help you maximize your tax credits, deductions, and savings. Order yours today.

## Capital Gains Tax Strategies

The capital gains tax effectively reduces the overall return generated by an investment, but there are legitimate ways to reduce or even eliminate net capital gains taxes for the year.

The simplest strategy is to hold assets for more than a year before selling them. The tax you'll pay on long-term capital gains is generally lower than it would be for short-term gains.

### Capital Losses and Tax-Loss Harvesting

Capital losses will offset capital gains and effectively lower your capital gains tax for the year, but what if the losses are greater than the gains?

You can claim the amount against your income if your losses exceed your gains by up to $3,000. The loss rolls over, so any excess loss above $3,000 that's not used in the current year can be deducted from income to reduce your tax liability in future years.

Say an investor realizes a profit of $5,000 from selling some stocks but incurs a loss of $20,000 from selling others. The capital loss can be used to cancel out tax liability for the $5,000 gain. The remaining capital loss of $15,000 can then be used to offset income and the tax on those earnings.

The investor whose annual investment income is $50,000 would report $50,000 minus a yearly maximum claim of $3,000 in the first year. That leaves a total of $47,000 in taxable income. The investor still has $12,000 in capital losses and can deduct the $3,000 maximum yearly for the next four years.

### Don't break the wash sale rule

Be mindful of selling stock shares at a loss to get a tax advantage and then turning around and buying the same investment again. You'll run afoul of the IRS [wash sale rule](https://www.investopedia.com/terms/w/washsale.asp) against this sequence of transactions if you do it within 30 days or less.

Material capital gains of any kind are reported on a [Schedule D form](https://www.investopedia.com/terms/s/scheduled.asp).

### Use tax-advantaged retirement plans

Among the many reasons to participate in a retirement plan like a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) or an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp) is that your investments grow from year to year without being subject to capital gains tax. You can buy and sell within a retirement plan without paying taxes every year.

Most traditional tax-advantaged retirement plans don't require participants to pay tax on the funds until they're withdrawn from the plan. Withdrawals are taxed as ordinary income regardless of the underlying investment.

> **Important**
>
> Qualified withdrawals from a Roth IRA or Roth 401(k) are tax-free if it's been five years since you first contributed to the account. Income taxes for these contributions are collected as you pay money into the account.

### Cash in after retiring 

Consider waiting until you stop working to sell profitable assets. The capital gains tax bill might be reduced if your retirement income is lower. You may even be able to avoid having to pay capital gains tax at all.

Be mindful of the impact of taking the tax hit while you're working rather than after you've retired. Realizing the gain earlier might serve to bump you out of a low- or no-pay bracket and cause you to incur a tax bill on the gains.

### Watch your holding periods

Remember that an asset must be sold at least a year or more after it was purchased for the sale to qualify for treatment as a long-term capital gain. Be sure to check the actual trade date of the purchase before you sell if you're selling a security that you bought about a year ago. You might be able to avoid its treatment as a short-term capital gain by waiting only a few days.

These timing maneuvers matter more with large trades than small ones.

### Choose your basis 

Most investors use the [first-in, first-out (FIFO)](https://www.investopedia.com/terms/f/fifo.asp) method to calculate the cost basis when they acquire and sell shares in the same company or mutual fund at different times. However, there are four other methods to choose from: [last in, first out (LIFO)](https://www.investopedia.com/terms/l/lifo.asp), [dollar value LIFO](https://www.investopedia.com/terms/d/dollar-value-lifo.asp), [average cost](https://www.investopedia.com/terms/a/averagecostmethod.asp), and [specific share identification](https://www.investopedia.com/terms/s/specific-share-identification.asp). Average cost is only available for mutual fund shares.

Your best choice will depend on several factors, such as the basis price of shares or units purchased and the amount of gain that will be declared. For complex cases, you may want to consult with a tax advisor.

Computing your cost basis can be a tricky proposition. Your statements will be on its website if you use an online broker. Be sure you have accurate records in some form in any case.

Determining when a security was purchased and at what price can be a nightmare if you've lost the original confirmation statement or other records. This is especially troublesome if you have to determine precisely how much was gained or lost when you're selling a stock, so be sure to keep track of your statements. You'll need those dates for the Schedule D form.  

## What Are Capital Gain Taxes?

Capital gain taxes are taxes imposed on the profit of the sale of an asset. The capital gains tax rate will vary by taxpayer based on the holding period of the asset, the taxpayer's income level, and the nature of the asset that was sold.

## When Do You Owe Capital Gains Taxes?

You'll owe the tax on capital gains for the tax year in which you realize the gain. Long-term capital gains taxes are owed on profits from the sale of most investments if they're held for longer than one year. The profits are considered short-term gains and are taxed as ordinary income if they're held for one year or less. This is a higher tax rate for most people.

## Do I Have to Pay Capital Gains Taxes Immediately?

You must pay the capital gains tax after you sell an asset in most cases. The IRS may require quarterly estimated tax payments in some cases. The actual tax may not be due for a while but you may incur penalties for having a large payment due without having made any installment payments toward it.  

## Are there capital gains tax exemptions on home sales?

Yes. If the home is your primary residence, married couples can exclude up to $500,000 (singles up to $250,000), provided you lived there for two of the last five years.

## The Bottom Line

Capital gains taxes are levied on profits made from the sale of assets like stocks or [real estate](https://www.investopedia.com/terms/r/realestate.asp). The tax is based on the holding term and the taxpayer's income level and is computed using the difference between the asset's sale price and its acquisition price. It can be subject to different rates.

> **Article Sources**
>
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