Capital Gains Tax: Short-Term vs. Long-Term Rates

What Are Capital Gains?

A capital gain occurs when you sell a capital asset — such as stocks, bonds, mutual funds, real estate, cryptocurrency, or collectibles — for more than you paid for it. The profit is taxable.

The amount you originally paid (plus any improvements or costs of acquiring the asset) is called your cost basis. Your gain = Sale Price − Cost Basis.

If you sell for less than your cost basis, you have a capital loss, which can offset gains and reduce your tax bill.

Short-Term vs. Long-Term Capital Gains

The tax rate depends on how long you held the asset before selling:

• Short-term capital gains: Assets held for one year or less. Taxed as ordinary income — at the same rates as your regular wages (up to 37%).
• Long-term capital gains: Assets held for more than one year. Taxed at special lower rates of 0%, 15%, or 20%.

2025 Long-Term Capital Gains Tax Rates

These thresholds are based on taxable income, not just capital gains income. Many middle-income taxpayers pay 0% federal tax on long-term capital gains.

Capital Losses

Capital losses can be used to reduce your tax bill:

• Short-term losses offset short-term gains first; long-term losses offset long-term gains first
• After netting, you can use net capital losses to offset ordinary income up to $3,000 per year
• Any excess losses can be carried forward to future tax years (no limit)
• This strategy of intentionally selling losing positions to offset gains is called "tax-loss harvesting"

Report on Schedule D of Form 1040.

Real Estate Capital Gains: Primary Residence Exclusion

The sale of your primary home receives special treatment:

• You can exclude up to $250,000 of gain ($500,000 for married filing jointly) from taxable income
• Requirements: You must have owned and lived in the home as your primary residence for at least 2 of the 5 years before the sale
• You can use this exclusion once every 2 years
• Gains above the exclusion amount are taxed at capital gains rates
• The exclusion does not apply to investment properties or second homes

Cryptocurrency and Digital Assets

The IRS treats cryptocurrency as property — not currency. Tax rules:

• Every sale, exchange, or other disposal triggers a taxable event
• Short-term gains (held ≤1 year) taxed as ordinary income
• Long-term gains (held >1 year) taxed at capital gains rates
• Using crypto to purchase goods or services is also a taxable event
• Mining or staking rewards are taxable as ordinary income when received
• You must report crypto transactions on your tax return even if you did not receive a 1099
• Form 8949 and Schedule D are used to report crypto transactions

Net Investment Income Tax (NIIT)

High-income taxpayers may also owe the 3.8% Net Investment Income Tax (NIIT) on investment income (including capital gains):

• Single filers: applies to MAGI above $200,000
• Married filing jointly: applies to MAGI above $250,000
• This is in addition to the regular capital gains rate
• Maximum combined federal rate for long-term capital gains: 23.8% (20% + 3.8%)