You sold your house, an investment property, or something else of value. So, when do you tell the Internal Revenue Service? While tax law can seem overwhelming for many Americans, we’re here to help you make sense of it. Below, you’ll learn how capital gains taxes work, when to make estimated tax payments, how to avoid capital gains tax, and more.
At a glance:
- If you sell an asset you own for a year or less, the proceeds are taxed like ordinary income.
- If you held the asset for over a year, you’re taxed at long-term capital gain tax rates, which are generally lower.
- You can use other tax events, such as selling depreciated assets or making charitable contributions, to offset capital gains tax.
What is capital gains tax?
Capital gains tax (sometimes written as capital gain tax) is the federal income tax you may owe when you sell a capital asset for more than its purchase price. Capital assets can include real estate, investment property, stocks, mutual funds, cryptocurrency, collectibles, and small business stock.
Your gain is generally the difference between your sale price and your cost basis (what you paid, plus certain adjustments, like improvements or depreciation). That profit is your net capital gain, which increases your taxable income and may raise your overall tax bill.
What is the capital gains tax rate?
Your capital gains tax rate for 2025 depends on your filing status, holding period, and your total taxable income for the tax year.
Long-term capital gains tax rate 2025
Assets held for more than one year qualify for long-term capital gains tax rates, which are typically lower than ordinary income tax rates. Here’s what the long-term gain brackets look like for tax year 2025:
| Tax rate | Single | Married filing jointly | Married filing separately | Head of household |
| 0% | $0 to $48,350 | $0 to $96,700 | $0 to $48,350 | $0 to $64,750 |
| 15% | $48,351 to $533,400 | $96,701 to $600,050 | $48,351 to $300,000 | $64,751 to $566,700 |
| 20% | $533,400 or more | $600,050 or more | $300,000 or more | $566,700 or more |
For example, if you’re in the 24% income tax bracket ($103,351 to $197,300 for single filers in 2025), your long-term capital gains tax rate is likely only 15%, based on the chart above. For some taxpayers in the lowest tax brackets (10% or 12%), the rate might even be tax-free at 0%. This is why holding assets for a longer period can be beneficial from a tax treatment standpoint.
Short-term vs. long-term capital gains
The main difference between short-term and long-term capital gains comes down to your holding period, a.k.a., how long you owned the capital asset before selling it.
Short-term capital gains tax
If you held an asset for one year or less before selling, the profit is considered a short-term capital gain. These gains are taxed at your ordinary income tax rate, which can make them more costly. For example, if you sell stocks after six months for a $10,000 profit and have a 24% federal tax rate, you could owe $2,400 in short-term capital gain tax on that sale.
Because short-term capital gains are taxed as ordinary income, they are subject to the same income tax brackets as wages and other earnings. Read our full guide to short-term capital gains tax.
Not sure which tax bracket you’re in? Try our tax bracket calculator.
Long-term capital gains tax
Assets held for more than one year qualify for the long-term capital gain tax rate, which is generally a lower rate than your ordinary income tax rate (see table in previous section). Learn more about long-term capital gains tax rates and strategies.
How to calculate capital gains tax
When selling assets, it’s crucial to know your cost basis (i.e., what you originally paid) and the sale price. The difference between these two is your taxable income from the sale. Check out our capital gains tax calculator for help estimating your taxable capital gain.
You can also calculate your gain based on your tax bracket — try using our income tax calculator to estimate how a sale might affect your overall taxable income.
You’ll report most sales of capital assets on Schedule D of your tax return. If you sell real estate or other real property, you may receive additional tax forms such as Form 1099-S. The IRS also receives copies of many reporting forms, including those related to cryptocurrency transactions and mutual fund distributions.
Keep in mind that state tax rules may also apply. Some states tax capital gains as ordinary income, while others follow federal tax treatment.
How dividends are taxed compared to capital gains
Capital gains taxes often come up alongside dividend taxes because both types of income typically come from investments like stocks and mutual funds. However, they are taxed differently depending on the type of dividend you receive:
| Investment income type | How it’s taxed | Typical tax rate |
|---|---|---|
| Ordinary dividends | Taxed as ordinary income and follow your normal federal income tax brackets | Your ordinary income tax rate |
| Qualified dividends | May receive the same tax treatment as long-term capital gains if they meet IRS requirements | 0%, 15%, or 20% depending on income |
| Capital gains | Taxed when you sell an asset for more than its cost basis; rate depends on your holding period | Short-term gains: ordinary income rate Long-term gains: 0%, 15%, or 20% |
Some mutual funds also distribute capital gains to shareholders when the fund sells assets at a profit. Even if you didn’t personally sell the investment, these distributions may still increase your taxable income for the year.
How capital gains tax affects tax brackets
Before you stress about paying taxes on that house sale or profitable stock trade, you need to determine how much your tax bill will increase — if at all.
Remember, short-term capital gains are taxed as ordinary income, meaning they are subject to the same income tax brackets as your wages and other earnings. Because of this, short-term gains can push you into a higher income tax bracket and increase the rate you pay on that income.
But long-term capital gains are taxed differently. They use separate tax rates (0%, 15%, or 20%) based on your total taxable income. While long-term gains don’t directly change your ordinary income tax bracket, they are added on top of your income and can push portions of your gain into a higher capital gains tax rate. Long-term gains can also increase your adjusted gross income (AGI), which may affect your eligibility for certain tax deductions or credits.
So, short-term capital gains can raise your ordinary income tax bracket, while long-term capital gains use separate tax rates but still depend on your total income.
Will I pay additional taxes because of capital gains?
Since capital gains stack on top of your other income, they can increase AGI and affect how your gains are taxed. As your total income increases, portions of your capital gain may move into higher capital gains tax brackets.
Like ordinary income tax rates, long-term capital gains tax rates are determined by your total taxable income, including the gain itself. As your income increases, portions of your capital gain may move into higher capital gains tax brackets.
Let’s look at a hypothetical example:
- Say you are a single filer with $40,000 of taxable income before any capital gains.
- In tax year 2025, the 0% long-term capital gains tax rate applies to taxable income up to $48,350.
- If you sell a parcel of land and realize a long-term capital gain of $50,000, your total taxable income becomes $90,000.
- The first $8,350 of your gain (the amount needed to reach the $48,350 threshold) qualifies for the 0% long-term capital gains tax rate.
- The remaining $41,650 of the gain is taxed at the 15% long-term capital gains tax rate.
In some cases, additional taxes may also apply. For example, high-income taxpayers may owe the net investment income tax (NIIT), an additional 3.8% tax that can apply when your modified adjusted gross income (MAGI) exceeds certain thresholds.
Special cases: How selling a home or the sale of property affects capital gains tax
While the basic rules above apply to most investments, certain types of property may have special tax treatment when you sell them.
- Sale of primary home: The sale of your primary residence may offer an exemption from capital gains taxes. For instance, homeowners may exclude up to $250,000 as a single filer ($500,000 for married filing jointly) of the gain from the sale of their primary residence under certain conditions.
- Investment property or other real estate: If you sell property you had previously depreciated, some of your profit may be taxed differently due to depreciation recapture. In simplified terms, depreciation recapture generally means the IRS taxes the portion of your gain equal to your prior depreciation deductions at a higher rate (up to 25%) instead of the lower long-term capital gains tax rate. This rule often applies to rental property and other income-producing real property.
- Collectibles: The sale of high-value property like collectibles (art, vintage cars, etc.) is subject to a higher capital gains tax rate of up to 28%. Items with inherent value due to rarity are typically treated as collectibles for tax purposes and must be reported accordingly on your tax return.
Estimated tax payments and capital gains
The IRS may require you to make estimated tax payments for any income not subject to withholding. If the sale of an asset leads to significant capital gains, you may need to pay quarterly taxes on the amount. Failing to do so can result in penalties and interest charged on the amount you should have paid. Generally, you must make estimated payments if you expect to owe more than $1,000 when filing your tax return and your withholding is less than 90% of your current year’s tax liability or 100% of your previous year’s taxes.
Alternatives to estimated tax payments
Instead of making quarterly payments, you could adjust your income tax withholding to account for the additional tax. You can increase your withholding by filing a new Form W-4 with your payroll department.
How to avoid capital gains tax
1. Use capital losses to offset gains.
If you’re staring down a big tax bill from capital gains, consider selling an asset that’s depreciated in value. Capital losses can offset capital gains, reducing the tax you owe. However, you must match short-term losses with short-term gains first, and the same applies to long-term gains and losses. You can also carry over excess capital losses to future years.
2. Find ways to lower your taxable income.
To minimize your taxable income, consider strategies like:
- Tax-loss harvesting
- Contributing to charity
- Investing in tax-advantaged accounts like an IRA or another retirement account.
FAQs
The bottom line
Understanding how capital gains taxes work can save you from unpleasant surprises at tax time. Whether it’s reporting short-term gains, strategizing your long-term capital gains tax rates, or finding smart ways to lower your tax liability, being informed is your best defense against an unexpected tax bill.
And don’t forget: If you need help along the way, TaxAct is here to make capital gains tax reporting less of a headache this tax season.
This article is for informational purposes only and not legal or financial advice.
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