Capital Gains Tax Guide
Capital gains tax is levied on the profit from selling an asset like stocks, bonds, or real estate. The rate you pay depends on how long you held the asset and your income level.
When you sell an investment for more than you paid, the profit is called a capital gain. The tax treatment hinges on your holding period: assets held for one year or less generate short-term capital gains taxed as ordinary income (up to 37% in 2025). Assets held longer than one year qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income.
Consider an example: Sarah, a single filer, earns $90,000 in ordinary income and sells stock for a $20,000 profit she held for 11 months. That $20,000 is taxed at her marginal rate of 24%, costing $4,800. If she had waited just one more month to sell, the gain would be long-term, taxed at 15% β just $3,000, saving $1,800. The one-year holding period is one of the most powerful levers investors control.
The 3.8% Net Investment Income Tax (NIIT) may also apply. If your modified adjusted gross income exceeds $200,000 ($250,000 married filing jointly), an additional 3.8% tax is tacked onto the lesser of your net investment income or the excess over the threshold. A high-earner selling a rental property could face 23.8% on long-term gains (20% + 3.8%) plus state taxes.
Calculating Cost Basis
Your gain is the sale price minus your cost basis (what you paid, including commissions and fees). If you reinvest dividends, those reinvestments increase your basis and reduce future gains. Many investors use specific identification (SpecID) when selling shares to select the lots with the highest cost basis, minimizing taxable gains in any given year.
FAQs
What is the 0% capital gains rate?
In 2025, single filers with taxable income up to $47,025 and married couples filing jointly up to $94,050 pay 0% on long-term capital gains. This means you can realize significant gains without federal tax, making it an ideal time to rebalance a portfolio or harvest gains up to the bracket limit.
How do state taxes affect capital gains?
Most states tax capital gains as ordinary income, though some offer preferential treatment. States like California, New York, and Oregon tax gains at high marginal rates, while Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax. Your effective capital gains rate is the federal rate plus your state rate.
Can capital gains push me into a higher bracket?
Yes. Capital gains are included in your adjusted gross income and can push you into higher tax brackets, phase out deductions, or trigger the NIIT. For example, a large gain could push your income above the $250,000 threshold for the 3.8% NIIT. Planning the timing of large gains across tax years can keep you below these thresholds.