Capital Gains

What is capital gains tax?

A capital gains tax is a tax on the profit from the sale of an asset. How the capital gain is taxed depends on filing status, taxable income and how long the asset was owned before selling.

The capital gains tax rate is 0%, 15% or 20% on most assets held for longer than a year. Capital gains taxes on assets held for a year or less correspond to ordinary income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% or 37%.

Capital gains taxes apply to the sale of capital assets for profit. This can include investments such as stocks, bonds, cryptocurrency, real estate, cars, boats and other tangible items.

How capital gains taxes work

Profit made from the sale of an asset is considered taxable income. The holding period — the time between when you bought the asset and when you sold it — determines how the profit gets classified for tax purposes. Profits made on assets held for a year or less before sale are considered short-term capital gains. Profits made on assets held for longer than a year are long-term capital gains.

Capital gains taxes are progressive, similar to income taxes. Short-term capital gains are taxed according to the relevant federal tax rate. Long-term capital gains are subject to 0%, 15% or 20%, depending on your taxable income. According to the IRS, most people pay no more than 15% on their long-term capital gains.

Only assets that have been "realized," or sold for profit, are subject to capital gains tax. This means that you won't incur taxes on any unsold, or "unrealized," investments that are, say, sitting in a brokerage account untouched.

What is short-term capital gains tax?

A short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less. Short-term capital gains are added to income and taxed at your ordinary income tax rate, or your tax bracket. 

What is long-term capital gains tax?

A long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is either 0%, 15% or 20%, depending on your taxable income and filing status. Long-term capital gains tax rates are generally lower than short-term capital gains tax rates.