Being in the green when you sell your investments can come with a tax bill. Here's what you need to know about these so-called capital gains—plus the short-term and long-term capital gains tax rates that may apply depending on how long you held your assets.
What are capital gains?
Capital gains are the profit you make from selling a capital asset (aka an investment like a stock, mutual fund, cryptocurrency, property, or ETF) for more than you bought it. For example, if you bought a stock for $100 and later sold it for $150, you would have capital gain of $50. Capital gains are important to stay on top of because the IRS considers them income, meaning they may be subject to taxes.
What is capital gains tax?
Capital gains tax is the tax you may have to pay on the profits of investments you've sold in the current tax year. Like income taxes, capital gains taxes vary based on your overall income level. The exact rate you pay is determined by 2 other important factors:
- How much you originally paid for an investment, plus adjustments (broker's fees, commissions, return of capital, etc.)
- When you bought it
The former is important to know as it sets the "cost basis" for the investment, or the benchmark used for determining how much profit or loss resulted from the sale. (Refer to your brokerage account for your actual cost basis—it can be adjusted as you add to the position as through dividend reinvestment programs or for other reasons like wash sales.)
Meanwhile, the amount of time since you bought the investment determines whether you have what are known as short-term or long-term capital gains and if you may be taxed at the short-term or long-term capital gains tax rate. Short-term capital gains taxes range from 0% to 37%. Long-term capital gains taxes run from 0% to 20%. High income earners may be subject to an additional 3.8% tax called the net investment income tax on both short-and-long term capital gains.
An important note: Capital gains taxes do not apply to investments held in tax-advantaged accounts, like 401(k)s and other employer-sponsored retirement plans, individual retirement accounts (IRAs), 529s, and health savings accounts (HSAs). For those types of accounts, you typically only incur taxes when you start taking withdrawals.
What are short-term capital gains?
A short-term capital gain is the profit on the sale of an investment that you've held for a calendar year or less. For example, if you bought a stock on September 15, 2022, and sold that stock on September 3, 2023, any profit from that sale would be considered a short-term capital gain. Short-term capital gains are typically taxed at your federal income tax rate, which is higher than the long-term capital gains tax rate. Short-term capital gains may also be subject to state and local taxes at income rates and not receive potential beneficial treatments like long-term capital gains.
What are long-term capital gains?
A long-term capital gain is the profit on the sale of an investment you've held for longer than a year. Continuing the example above, if you held on 13 more days, until September 16, 2023, to sell your stock, any profit would be considered a long-term capital gain. Unlike short-term capital gains, long-term capital gains are not taxed at your federal income tax rate and instead have their own tax rate. It is determined based on income and is typically less than your income tax rate. Long-term capital gains may also be subject to state and local taxes.
Capital gains tax rate 2023
The table below details the capital gains rates for 2023:
Long-term capital gains tax rates 2023
| Capital gains tax rate | Single (taxable income) | Married filing separately (taxable income) | Head of household (taxable income) | Married filing jointly (taxable income) |
| 0% | Up to $44,625 | Up to $44,625 | Up to $59,750 | Up to $89,250 |
| 15% | $44,626 to $492,300 | $44,626 to $276,900 | $59,751 to $523,050 | $89,251 to $553,850 |
| 20% | Over $492,300 | Over $276,900 | Over $523,050 | Over $553,850 |
Source: IRS. Short-term capital gains rates for 2023 apply sales of assets you have held for a year or less and are the same as your current federal income tax rate.
Capital gains tax rates for 2024
The table below details the capital gains rates for 2024:
Long-term capital gains tax rate 2024
| Capital gains tax rate | Single (taxable income) | Married filing separately (taxable income) | Head of household (taxable income) | Married filing jointly (taxable income) |
| 0% | Up to $47,025 | Up to $47,025 | Up to $63,000 | Up to $94,050 |
| 15% | $47,026 to $518,900 | $47,026 to $291,850 | $63,001 to $551,350 | $94,051 to $583,750 |
| 20% | Over $518,900 | Over $291,850 | Over $551,350 | Over $583,750 |
Source: IRS. Short-term capital gains rates for 2024 cover investments you buy and sell within 1 year or less and are equal to your current federal income tax rate.
How to help reduce capital gains tax
Consider these tips to help reduce the capital gains taxes you may owe.
1. Invest using tax-advantaged accounts when possible.
Remember: Tax-advantaged accounts generally don't generate capital gains taxes federally, and generally not at the state level although individual state rules may apply. So investing in these types of accounts could help you benefit from that major perk. As a bonus, some accounts may offer tax-deductible contributions, potentially lowering your tax liability.
Ready to open a tax-advantaged investment account? Here's how to get started now if you choose Fidelity.
2. Hold on for the long term.
One of the biggest deciding factors in how much you may owe in capital gains taxes is how long you hold those investments. While you may not want to keep all of your investments for over a year, if you're considering a sale near the one-year mark after purchasing an investment, it could make sense to wait longer in order to benefit from the long-term capital gains rate.
According to the IRS, the tax rate on most long-term capital gains is no higher than 15% for most people. And for some, it's 0%. For the highest earners in the 37% income tax bracket, waiting to sell until they've held investments at least one year could cut their capital gains tax rate to 20%. Keep in mind that some high earners may be subject to an additional 3.8% net investment income tax regardless of when you sell for a profit.
3. Consider tax-loss harvesting.
Tax-loss harvesting allows you to sell investments that are down and use those capital losses (meaning you sold for less than the purchase price) to offset the capital gains generated by other investments. Remaining losses can be used to offset income generally up to $3,000 and unused losses thereafter can be carried forward to future years.
If you use a tax-loss harvesting strategy, be careful about any other investments you buy in the 30 days before or after you sell an investment at a loss. If the investments are deemed "substantially identical," the IRS may consider them a "wash-sale," meaning you won't be able to write off the loss. Tax-loss harvesting can be complicated to implement, so consider discussing with a financial professional.
Other things to keep in mind about capital gains taxes
Capital gains taxes are not automatically deducted from your profit. Any capital gains or losses you make in a tax year are usually reported by your brokerage on Form 1099-B.
Most states also collect tax on capital gains. Some states tax capital gains at their income tax rate; other states tax long-term capital gains at less than their ordinary income rate or offer deductions or credits; and others don't collect tax on capital gains at all. Consult a tax advisor to better understand your state and local capital gains tax rates.
