The capital gains tax is levied on any profit made from the sale of an asset in a given year, whether it's a home, a car, stocks and bonds or cryptocurrency.
Not everyone pays capital gains tax, though, and the amount you do pay is determined by your filing status, taxable income and how long you held onto the asset before selling it.
Below, CNBC Select explains the types of capital gains taxes, how losses can offset capital gains or other income and how to file your return if you've made capital gains.
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What is capital gains tax?
A capital gains tax is a levy placed on profits from the sale of an asset, whether its a physical asset — like a house, car or boat — or intangible assets — like stocks, bonds, mutual funds and cryptocurrency.
How a capital asset is taxed depends on your taxable income and filing status, as well as how long you owned the asset before selling it, according to Ryan Dennehy, principal at California Financial Advisors.
Profits made on assets held for a year or less are considered short-term capital gains. Profits made on assets held for more than a year are considered long-term capital gains.
For long-term capital gains, the tax rate for tax year 2023 is 0%, 15% or 20%, depending on your status and income.
Short-term capital gains follow the traditional income tax brackets for tax year 2023: 10%, 12%, 22%, 24%, 32%, 35% or 37%.
What investments are subject to capital gains tax?
Several types of investments are considered capital gains if sold at a profit. In addition to the categories below, jewelry, precious metals and other collectibles like antiques, art and rate coins are also subject to the tax, according to the IRS.
Real estate
If you buy and sell any property, the profit is considered part of your yearly income and could be subject to a capital gains tax. That includes your primary residence, a vacation home or an investment property.
You can, however, exclude the first $250,000 you make from selling your home (or the first $500,000 if you're married and filing jointly) if you meet these criteria.
- You owned the home for two of the last five years before you closed on the sale.
- You lived in the home for at least 24 months over the last five years. If you're married and filing jointly, both spouses must meet this requirement.
- You haven't sold another home in the past two years.
- You did not acquire the property through a "like-kind exchange," meaning you did not trade a similar property to get ownership of this one. Taking out a mortgage or paying in cash are not like-kind exchanges.
- You are not subject to an expatriate tax.
Consult the IRS website for more details on exclusions to the capital gains tax on real estate.
Stocks and bonds
If you sold a stock or cashed in a savings bond, any profit you make on the sale must be reported as income and a capital gains tax must be paid.
If you've lost money in a stock, you may be able to subtract your losses from your taxable income. We discuss this more below.
Mutual fund shares
Since mutual funds must pass along capital gains and dividends to shareholders in the form of a yearly distribution, shareholders are responsible for paying short-term or long-term capital gains tax on those distributions.
Whether an investor is paying short-term or long-term capital gains tax depends on the trading activity of the specific mutual fund, Dennehy told CNBC Select.
"If an investor purchases shares of a mutual fund in November and then in December, that fund kicks out a large capital gain distribution for the entire year of trading activity," he said, "that investor is on the hook for paying taxes on capital gains that occurred throughout the entire year — even for trading activity that occurred before they actually purchased the shares of the mutual fund."
Dennehy recommends that investors consider investing in actively traded, tax-inefficient mutual funds through their retirement accounts to avoid paying capital gains taxes on yearly distributions.
Digital currency
Money made from the sale of digital currency is subject to a capital gains tax. Examples of digital currency include
- Cryptocurrency
- Stablecoins
- Convertible virtual currency,
- non-fungible tokens (NFTs)
To accurately report what you've made or lost in digital assets, you'll need to have documentation
- Type of digital asset
- Date and time of transaction
- Number of units
- Fair market value at the time of the transaction (in U.S. dollars)
- The cost of the sold asset
Types of capital gains tax
How an asset is taxed depends on your filing status, taxable income and how long you owned the asset before selling it.
Short-term capital gains
A short-term capital gains tax is assessed on the sale of assets you've owned for a year or less. Short-term capital gains are taxed as ordinary income according to the federal income tax brackets.
These are the brackets and rates that apply to income earned in 2023.
2023 Tax Brackets (Taxes Due 2024)
| Tax Rate | Single | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | $11,000 or less | $22,000 or less | $11,000 or less | $15,700 or less |
| 12% | $11,001 to $44,725 | $22,001 to $89,450 | $11,001 to $44,725 | $15,701 to $59,850 |
| 22% | $44,726 to 95,375 | $89,451 to $190,750 | $44,726 to $95,375 | $59,851 to $95,350 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 | $95,376 to $182,100 | $95,351 to $182,100 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 | $182,101 to $231,250 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 | $231,251 to $346,875 | $231,251 to $578,100 |
| 37% | Over $578,125 | Over $693,750 | Over $346,875 | Over $578,100 |
Source: IRS.gov
These are the brackets and rates that apply to income earned in 2024.
2024 Tax Brackets (Taxes Due 2025)
| Tax Rate | Single | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | $11,600 or less | $23,200 or less | $11,600 or less | $16,550 or less |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $11,601 to $47,150 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $47,151 to $100,525 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,725 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 | $234,701 to $609,350 |
| 37% | Over $609,350 | Over $731,200 | Over $365,600 | Over $609,350 |
Source: IRS.gov
Dennehy recommends holding onto an asset for more than a year to avoid having to pay the higher federal income tax rate.
Long-term capital gains
If you've made a profit by selling an asset you've owned for more than a year, the earnings are subject to a long-term capital gains tax, which can be up to 20%.
In 2023, individual filers whose total taxable income is $44,625 or below won't pay any capital gains tax.
Capital gains tax for 2023
| Filing status | 0% | 15% | 20% |
| Single | $0 to $44,625 | $44,626 to $492,300 | $492,301 or more |
| Married filing jointly | $0 to $89,250 | $89,251 to $553,850 | $553,851 or more |
| Married filing separately | $0 to $44,625 | $44,626 to $276,900 | $276,901 or more |
| Head of household | $0 to $59,750 | $59,751 to $523,050 | $523,051 or more |
For the 2024 tax year, the threshold for an individual filer to pay capital gains tax is $47,026.
Capital gains for 2024
| Filing status | 0% | 15% | 20% |
|---|---|---|---|
| Single | $0 to $47,025 | $47,026 to $518,900 | $518,900 or more |
| Married filing jointly | $0 to $94,050 | $94,051 to $583,750 | $583,750 or more |
| Married filing separately | $0 to $47,025 | $47,026 to $291,850 | $291,850 or more |
| Head of household | $0 to $63,000 | $63,001 to $551,350 | 551350 or more |
Net investment income tax
Some taxpayers are subject to an additional tax called a net investment income tax (NIIT).
- Single taxpayers making over $200,000
- Married couples filing jointly making over $250,000
- Married couples filing separately making over $125,000
The NIIT is applied to capital gains, dividends and income from rentals, royalties or passive investments. In general, it's a 3.8% tax on either your investment income or the amount of money you made above the income threshold.
State capital gain taxes
Most states tax capital gains at the same rate as the federal government. Nine states — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — do not tax capital gains.
Depending on which of those states you live in, however, you may still be taxed on dividends or interest made from investments.
Nine other states — Arizona, Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont and Wisconsin — levy lower tax rates on capital gains than on regular income. Taxpayers in these states may be able to exclude a portion of their capital gains from their taxable income.
Some states allow tax breaks on capital gains earned by investing in state businesses, while others offer tax breaks on capital gains in specific industries, like farming.
How capital losses impact your taxes
If you sell an asset for less than it's worth, you could be able to subtract this loss from whatever capital gains or income you have that year, Dennehy said.
"If an investor accrued $10,000 in long-term capital gains over a year and then, at the end of the same year, decided to sell one of their losing investments that had $8,000 in losses — the net effect would be $2,000 of long-term capital gains that they owe taxes on," he explained.
Individuals can deduct up to $3,000 of capital losses from their income annually with the option of carrying over their net capital losses from year to year, up to $3,000.
"This process can continue indefinitely, only ceasing once all net capital losses have been used up to either offset capital gains or offset ordinary income," Dennehy said.
Capital losses from your income can't be subtracted if you buy back the same or "'substantially identical" security within 30 days, he added. This is because of an anti-abuse measure known as the "wash sale rule."
How to report capital gains and losses on your taxes
To file your capital gains and losses, you must fill out Form 1040, Schedule D. You may also need to file Form 8949, Sales and Other Disposition of Capital Assets. The IRS has detailed instructions and advice that can help.
If you want to file your return yourself, TurboTax is one of the most popular online tax software programs on the market. The premium package supports reporting income from investments, rental properties and other sources impacted by the capital gains tax. You can also pay for live assistance from a tax expert who will review your return before you file.
TurboTax
Cost
Costs may vary depending on the plan selected - click "Learn More" for details
Free version
TurboTax Free Edition. ~37% of taxpayers qualify. Form 1040 + limited credits only.
Mobile app
Yes
Live support
Available with some pricing and filing options
Click here for TurboTax offer details and disclosures. Terms apply.
H&R Block's Premium version is another good option if you have capital gains to report or need to make itemized deductions. For an additional fee, unlimited online help from a tax expert is available via video-conferencing, screen-sharing or mobile app.
H&R Block
Cost
Costs may vary depending on the plan selected (Free Online, Deluxe, Premium, or Self-Employed) - click "Learn More" for details
Free version
Yes (for simple returns only)
Mobile app
Yes
Live support
Available with some pricing and filing options
Terms apply.
FAQ
What is the capital gains tax?
It is a tax on the profit made from selling an asset, including a house, car, or personal possessions, as well as stocks, bonds and digital currency like stablecoin and NFTs
How do I avoid paying the capital gains tax on real estate?
If you sold a home you lived in for two of the last five years, you can exclude the first $250,000 you made from selling the house home (or the first $500,000 if you're married and filing jointly). This exemption is only allowable once every two years.
Can I deduct capital losses?
Yes, you can use capital losses to offset capital gains during a given tax year up to $3,000.
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Bottom line
Whether you're a seasoned investor or still learning, knowing how capital gains tax will affect your tax bill is important. You can avoid paying the higher short-term capital gains tax by holding onto a security for more than a year.
Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and experience. For this story, we interviewed Ryan Dennehy, principal at California Financial Advisors.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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