What is capital gains tax in the US?

Capital gains tax is a tax on the profit you make from selling an asset that has increased in value - such as stocks, real estate, or a business. You pay tax on the gain (the sale price minus what you paid), not the full sale proceeds. The rate you pay depends on how long you held the asset and your total taxable income. Assets held for more than one year qualify for lower long-term capital gains rates. Assets held one year or less are taxed as ordinary income at your regular tax rate.

How do I avoid capital gains tax on stocks in the US?

Legal ways to reduce capital gains tax on stocks include: holding assets for more than one year to qualify for lower long-term rates, using tax-advantaged accounts like IRAs and 401(k)s where gains are not taxed annually, tax-loss harvesting (selling losing positions to offset gains), staying in the 0% long-term capital gains bracket if your income allows, and donating appreciated stock to charity instead of selling it.

Capital Gains Tax US: Rates, Rules & How to Minimise It 2025

Q: What are the long-term capital gains tax rates for 2025?

For 2025, the long-term capital gains tax rates are 0%, 15%, or 20% depending on your taxable income. Single filers pay 0% on gains up to $48,350, 15% on gains between $48,351 and $533,400, and 20% above $533,400. Married filing jointly pays 0% up to $96,700, 15% between $96,701 and $600,050, and 20% above $600,050. High earners may also owe an additional 3.8% Net Investment Income Tax on top of these rates.

What Is Capital Gains Tax?

Capital gains tax is what you owe when you sell an asset for more than you paid for it. The profit is the capital gain, and that's what gets taxed - not the full sale price.

The US tax system treats capital gains differently depending on how long you owned the asset before selling:

Short-term capital gains - assets held for one year or less. Taxed as ordinary income at your regular federal tax rate (10% to 37%)
Long-term capital gains - assets held for more than one year. Taxed at preferential rates of 0%, 15%, or 20% depending on your income

The difference is massive. A $20,000 gain on shares sold after 11 months could cost you $7,400 in federal tax (37% bracket). The same $20,000 gain on shares sold after 13 months might cost $3,000 (15% rate) - or nothing at all if your income is low enough.

The single most powerful capital gains tax strategy available to most investors is simply holding assets for more than one year. The difference between short-term and long-term rates can mean paying twice as much tax on the same gain. If you're close to the one-year mark, waiting a few extra weeks to sell can save a meaningful amount.

2025 Long-Term Capital Gains Rates

Rate	Single Filers (Taxable Income)	Married Filing Jointly
0%	Up to $48,350	Up to $96,700
15%	$48,351 to $533,400	$96,701 to $600,050
20%	Above $533,400	Above $600,050

These rates apply to your taxable income including the capital gains. So if you earn $40,000 in salary (single filer) and have a $20,000 long-term gain, your total taxable income is $60,000. The first $8,350 of the gain falls in the 0% bracket, and the remaining $11,650 is taxed at 15%.

Net Investment Income Tax adds 3.8% for high earners

If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), an additional 3.8% Net Investment Income Tax (NIIT) applies to the lesser of your net investment income or the amount your income exceeds those thresholds. This means the top effective federal rate on long-term capital gains is 23.8% (20% + 3.8%), not 20%. State taxes add further on top of this in most states.

What Assets Are Subject to Capital Gains Tax?

Stocks and ETFs - sold at a profit trigger capital gains. Dividends are taxed separately (qualified dividends at long-term rates, ordinary dividends at income rates)
Mutual funds - you owe CGT when you sell fund shares, and the fund itself may distribute capital gains each year that you owe tax on even if you didn't sell
Real estate - gains on investment properties are subject to CGT. Your primary home has a special exclusion (up to $250,000 gain for single filers, $500,000 for married)
Cryptocurrency - the IRS treats crypto as property. Selling, trading, or using crypto to buy goods triggers a capital gain or loss
Business assets - selling a business or business assets generates capital gains
Collectibles - taxed at a maximum rate of 28% for long-term gains, regardless of your income bracket

How to Reduce Your Capital Gains Tax Bill

1. Use tax-advantaged accounts

Gains inside a 401(k), IRA, or Roth IRA are not taxed annually. In a Roth IRA, qualified withdrawals are completely tax-free - meaning decades of gains are never taxed at all. Max these accounts before investing in taxable brokerage accounts for long-term growth.

2. Hold for more than one year

The simplest strategy. If you're sitting on a gain after 11 months, waiting another month or two to cross the one-year threshold changes the tax rate from your ordinary income rate to the preferential long-term rate. This alone is often worth hundreds or thousands of dollars.

3. Tax-loss harvesting

If you have investments sitting at a loss, selling them generates a capital loss that offsets capital gains dollar for dollar. You can then immediately reinvest in a similar (but not identical) fund to maintain your market exposure. If losses exceed gains, up to $3,000 of net losses can offset ordinary income per year, with remaining losses carried forward indefinitely.

Wash sale rule - 30-day restriction

If you sell a security at a loss and buy the "same or substantially identical" security within 30 days before or after the sale, the IRS disallows the loss under the wash sale rule. To harvest the loss properly, either wait 31 days to repurchase, or buy a different but similar fund (e.g. sell one S&P 500 ETF and buy a different S&P 500 ETF from a different provider) - the wash sale rule applies to identical securities, not to funds tracking the same index from different issuers.

4. Stay in the 0% bracket

If your taxable income is below $48,350 (single) or $96,700 (married), your long-term capital gains rate is 0%. In years when your income is low - perhaps between jobs, in early retirement before Social Security, or in a gap year - you can realise capital gains with zero federal tax. This is a powerful but underused strategy.

5. Donate appreciated stock to charity

If you donate appreciated stock directly to a charity (rather than selling the stock and donating cash), you avoid paying capital gains tax on the gain entirely. You also get a charitable deduction for the full market value of the shares. This is more tax-efficient than selling the stock, paying CGT, and donating the after-tax proceeds.

6. Primary home exclusion

If you sell your primary residence after living in it for at least 2 of the past 5 years, you can exclude up to $250,000 of gain from tax ($500,000 if married filing jointly). This exclusion can be used once every two years. It's one of the largest CGT exemptions available to individuals.

Capital Gains on Real Estate - Special Rules

Real estate has its own wrinkles beyond the primary home exclusion:

Depreciation recapture: Investment properties can be depreciated for tax purposes. When you sell, the IRS "recaptures" this depreciation at a rate of up to 25%, separately from the standard capital gains rate
1031 exchange: If you reinvest proceeds from a property sale into a "like-kind" property within strict timelines (45 days to identify, 180 days to close), you can defer capital gains tax indefinitely. This is widely used by real estate investors to keep rolling gains forward without triggering tax
Inherited property: Assets inherited receive a "step-up in basis" to the fair market value at the date of death. This means if you inherit and immediately sell property, there may be little or no capital gains tax owed - only gains accruing after the inheritance date are taxable

Frequently Asked Questions

For 2025, long-term capital gains rates are 0%, 15%, or 20% depending on taxable income. Single filers pay 0% up to $48,350, 15% between $48,351 and $533,400, and 20% above $533,400. Married filing jointly pays 0% up to $96,700, 15% up to $600,050, and 20% above that. High earners may also owe an additional 3.8% Net Investment Income Tax on top of these rates.

The IRS treats cryptocurrency as property, not currency. Every time you sell, trade, or use crypto to make a purchase, it's a taxable event. If you held the crypto for more than a year, long-term rates apply. If less than a year, short-term rates (ordinary income) apply. Even swapping one cryptocurrency for another is a taxable event. You must track your cost basis for every transaction and report gains and losses on your tax return.

Tax-loss harvesting means selling investments that are sitting at a loss to generate a capital loss that can offset capital gains. For example, if you have a $10,000 gain on one stock and a $4,000 loss on another, selling the losing stock reduces your net taxable gain to $6,000. The watch-out is the wash sale rule - you can't buy back the same or substantially identical security within 30 days. You can reinvest in a similar-but-different fund to maintain your market exposure.

Often no, thanks to the primary home exclusion. If you've owned and lived in the home for at least 2 of the past 5 years, you can exclude up to $250,000 of gain ($500,000 married filing jointly) from capital gains tax. This exclusion can be used once every two years. Gains above the exclusion amount are subject to long-term capital gains rates. The exclusion doesn't apply to second homes, investment properties, or homes where you haven't met the 2-year residency test.

Important: Tax rules, rates, and thresholds are set by the IRS and change annually. Always verify current figures at irs.gov or with a qualified tax professional. State capital gains taxes apply in most states and are not covered here. This is educational content only - not tax or financial advice.