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US Capital Gains Tax Basics: Short-Term vs. Long-Term

Capital gains tax is owed on the profit from selling an investment for more than you paid for it, and in the US, how long you held that investment before selling β€” not just how much you made β€” determines which tax rate applies.

A gain is the profit, not the total sale price

Capital gains tax applies to the difference between what you sell an asset for and your cost basis, which is generally what you originally paid plus certain adjustments β€” not the full amount you receive from the sale.

The one-year holding period is the single biggest factor

An asset sold after being held for one year or less produces a short-term capital gain, taxed at your regular ordinary income tax rates. An asset held for more than one year before selling produces a long-term capital gain, taxed at lower preferential rates.

Long-term rates are generally 0%, 15%, or 20%, based on income

Most taxpayers fall into the 15% long-term capital gains bracket, with a 0% rate available to lower-income filers and a 20% top rate applying only above a high income threshold. These income thresholds are adjusted periodically, so check current IRS figures rather than relying on a remembered number.

Capital losses can offset capital gains, and a limited amount of ordinary income

Selling a losing investment creates a capital loss that first offsets capital gains of the same type, then any remaining gains of the other type, and finally up to a capped amount of ordinary income each year, with any excess loss carried forward to future tax years.

It applies beyond stocks β€” real estate, crypto, and collectibles too

Selling a home, cryptocurrency, or a collectible for more than its cost basis can also trigger capital gains tax, though each category has its own specific rules and exceptions, such as the primary residence exclusion available for a personal home.

Why selling one day earlier or later can matter

Because the short-term versus long-term line is drawn at exactly one year, selling an appreciated asset a few days before hitting the one-year mark can push the entire gain into the higher, ordinary-income tax bracket instead of the lower long-term rate. Checking the exact purchase date before selling a highly appreciated position is a simple step that can meaningfully change the tax owed.

Tax-advantaged accounts change the picture entirely

Capital gains tax generally only applies to investments held in a regular taxable brokerage account. Gains inside a tax-advantaged account such as a 401(k) or an IRA are not taxed as capital gains in the year they occur β€” they follow the very different tax rules of that account type instead, which is one reason account type matters as much as holding period.

Frequently Asked Questions

Do I owe capital gains tax if I have not sold the investment yet?

No. An unrealized gain β€” meaning the asset has increased in value but you still own it β€” is not taxed. Capital gains tax is triggered by an actual sale or other taxable disposal of the asset, which is why it is sometimes called a "realized" gain.

Are capital gains taxed the same at the state level?

Not necessarily. Many states tax capital gains as ordinary income at their own state income tax rates, some offer preferential treatment similar to the federal system, and a handful of states have no state income tax at all. Check your specific state's rules in addition to the federal treatment described here.