Capital Gains Tax
A tax levied on the profit realized from the sale of a capital asset, such as stocks, bonds, or real estate, when the proceeds exceed the original purchase price.
Capital gains tax is one of the most significant tax considerations for investors in the United States. When you sell a capital asset for more than you paid for it, the difference — known as the capital gain — becomes taxable income in the year the sale occurs. The IRS distinguishes between two types of capital gains based on how long you held the asset before selling it: short-term and long-term.
Short-term capital gains apply to assets held for one year or less and are taxed at ordinary income tax rates, which can be as high as 37% for the highest earners in 2025. Long-term capital gains, which apply to assets held for more than one year, benefit from preferential tax rates of 0%, 15%, or 20%, depending on your taxable income and filing status.
For 2025, the 0% long-term capital gains rate applies to single filers with taxable income up to $48,350 and married filing jointly couples with income up to $96,700. The 15% rate applies to single filers earning between $48,351 and $533,400, and the 20% rate kicks in above those thresholds. High-income taxpayers may also owe the 3.8% Net Investment Income Tax on top of these rates.
Capital gains are reported on Schedule D of Form 1040, with the details of each transaction listed on Form 8949. Losses from capital asset sales can offset capital gains, and if losses exceed gains, up to $3,000 of the excess loss can be deducted against ordinary income each year, with the remainder carried forward to future tax years.
Strategic planning around capital gains tax — such as timing asset sales, tax-loss harvesting, and utilizing tax-advantaged accounts — can meaningfully reduce your overall tax burden. Understanding how capital gains tax works is foundational to building a tax-efficient investment portfolio.