Capital gains taxes can influence when and how someone decides to sell an investment. Many people focus on the headline rates, yet the real impact often comes from how long the asset is held. A sale made after a short holding period may lead to a higher tax bill, while gains on longer-held assets can receive more favorable treatment.
Readers often want clarity on how these rules apply to different income levels and filing statuses. Here’s a clear starting point for understanding what distinguishes short-term and long-term treatment, along with the rates that generally apply in 2024 and 2025.
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How the Holding Period Shapes Capital Gains
Short-term and long-term capital gains are treated differently for federal tax purposes.
Short-term gains apply to assets held for one year or less. These gains are taxed at ordinary income tax rates. Long-term gains apply to assets held for more than one year and generally qualify for preferential rates of 0%, 15%, or 20%, depending on filing status and taxable income.
The holding period determines which set of rules applies. It also affects how certain depreciation recapture is taxed. The holding period does not usually change the original cost basis.
2024 Long-Term Capital Gains Tax Rates
The table below shows the long-term capital gains brackets for the 2024 tax year.
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
| Single | $0 to $47,025 | $47,026 to $518,900 | $518,901 or more |
| Married Filing Jointly | $0 to $94,050 | $94,051 to $583,750 | $583,751 or more |
| Married Filing Separately | $0 to $47,025 | $47,026 to $291,850 | $291,851 or more |
| Head of Household | $0 to $63,000 | $63,001 to $551,350 | $551,351 or more |
2025 Long-Term Capital Gains Tax Rates
The IRS adjusts capital gains thresholds each year to account for inflation. These updates can influence whether part of a realized gain falls into a lower bracket. The 2025 ranges reflect these annual adjustments and move slightly upward from 2024 levels.
The table below outlines the long-term capital gains brackets for 2025.
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
| Single | $0 to $48,350 | $48,351 to $533,400 | $533,401 or more |
| Married Filing Jointly | $0 to $96,700 | $96,701 to $600,050 | $600,051 or more |
| Married Filing Separately | $0 to $48,350 | $48,351 to $300,000 | $300,001 or more |
| Head of Household | $0 to $64,750 | $64,751 to $566,700 | $566,701 or more |
📝 Note: Short-term capital gains do not use these thresholds. They are taxed as ordinary income, which ties the rate to your broader income profile for the year.
📌 You can view income tax rates for 2025 here.
What Are Capital Gains?
Capital gains are the profit earned when you sell a capital asset for more than its cost basis. The cost basis usually reflects what you originally paid for the asset, including certain adjustments the IRS allows. When the selling price exceeds that amount, the difference is the gain.
Capital assets include a wide range of items that someone may own for investment or personal use. These can be financial assets or tangible property. Examples include stocks, bonds, real estate, vehicles, collectibles, cryptocurrencies, and NFTs.
📝 Note: Not all gains are taxable. Some transactions qualify for exclusions under IRS rules, such as certain home-sale gains that may not need to be included during tax filing.
How Capital Gains Work
Capital gains fall into two categories based on how long the asset was held. The holding period affects the tax rate applied when a gain is realized.
Holding Period Categories
- Short-term capital gains: Gains realized on assets held for one year or less.
- Long-term capital gains: Gains realized on assets held for more than one year.
The clock begins on the day after you acquire the asset. It ends on the day you sell or exchange it. Taxable gains are generally reported on Form 8949 and Schedule D as part of the annual federal income tax return, unless a gain is fully excludable.
How Capital Gains Are Taxed
Short-term and long-term capital gains are taxed differently for federal income tax purposes. The rate applied depends on the classification and the taxpayer’s filing status.
Short-term gains are treated the same as ordinary income. This means the rate applied matches the taxpayer’s income tax bracket.
Ordinary Income Tax Brackets (Short-Term Gains)
10%, 12%, 22%, 24%, 32%, 35%, or 37%
Long-term gains receive preferential tax treatment because they are linked to separate capital gains brackets. These brackets still depend on taxable income, yet the rates are usually lower than ordinary income rates.
Long-Term Capital Gains Tax Brackets
0%, 15%, or 20%
📝 Note: The IRS may apply additional taxes in specific situations, such as the Net Investment Income Tax, which applies above certain income thresholds.
Realized vs. Unrealized Capital Gains
Realized gains occur when you sell or exchange the asset and receive more than the cost basis. This usually creates a taxable event, unless a specific exclusion or deferral rule applies. You typically report realized taxable gains on your federal tax return.
Unrealized gains occur when an asset increases in value but has not been sold. These gains are not taxable because they remain on paper until a sale or disposition takes place.
When You Owe Capital Gains Tax
Capital gains tax generally becomes due for the tax year in which a taxable gain is realized. The sale or exchange of an asset triggers the calculation. Some gains may be excluded or deferred, depending on IRS rules.
In most cases, the tax is owed when federal income taxes are filed for that year.
✏️ Hypothetical Example:
Consider a purchase of 10 shares of Apple (AAPL) in February 2025 at $150 per share. The total cost basis is $1,500. If the shares are sold in June 2025 for $2,500, the $1,000 difference is a realized short-term capital gain because the shares were held for less than one year. Short-term gains are taxed at ordinary income rates. A taxpayer in the highest bracket could owe up to 37% on that short-term gain.
If the same shares were sold in June 2026 for the same $2,500 value, the gain would be long-term because the holding period exceeds one year. Long-term capital gains follow the preferential capital gains brackets. Even at higher income levels, the top long-term capital gains rate is 20%.
Capital Gains Tax Rates for Retirement Accounts
Retirement accounts offer tax advantages that change how investment gains are treated. Capital gains inside these accounts are not taxed when they occur. Instead, the tax outcome depends on the account type and how withdrawals are handled during retirement. This structure allows earnings to grow without annual capital gains tax, which can support long-term compounding.
There are two broad categories of retirement accounts: Traditional (pre-tax) and Roth (post-tax). Each applies different rules when gains are eventually accessed through qualified distributions.
✅ Traditional Retirement Accounts (401k, IRA)
Traditional accounts are funded with pre-tax dollars. Gains inside the account remain tax-deferred until withdrawal. When distributions begin in retirement, they are taxed as ordinary income. The holding period of the asset inside the account does not influence the rate that applies. This is because the IRS taxes the withdrawal itself, not the underlying capital gain.
✅ Roth Retirement Accounts (Roth 401k, Roth IRA)
Roth accounts use post-tax contributions. Earnings grow tax-free, and qualified withdrawals in retirement are also tax-free. Since contributions were already taxed and earnings are exempt when withdrawn, no capital gains tax applies. This treatment does not change based on how long the asset was held.
📝 Note: During tax filing in retirement, withdrawals from Traditional accounts are treated as taxable income, while qualified Roth withdrawals do not increase taxable income for the year.
How to Minimize Capital Gains Taxes
Strategies to reduce capital gains tax often focus on timing, account selection, and how assets are used. None of these approaches eliminate tax obligations outright, yet they can influence how much is owed.
Ways to reduce capital gains exposure:
- Hold assets for more than one year. Gains realized after a longer holding period may qualify for lower long-term capital gains rates.
- Use tax-advantaged accounts. Contributions to accounts such as 401(k) plans, Roth IRAs, or 529 plans allow investments to grow without immediate taxation. Some accounts offer tax-free withdrawals, depending on rules and eligibility.
- Follow home-sale exclusion rules. A primary residence may qualify for an exclusion of up to $250,000 of gain ($500,000 for joint filers) if residency requirements are met. The exclusion cannot be taken again within a two-year window.
📌 Also read: Important Tax Filing Deadlines to Remember
Wrapping Up
Capital gains tax rules affect how investment gains are classified and taxed, and the impact often depends on income, filing status, and the length of time an asset is held. Long-term gains generally receive more favorable tax treatment, while gains inside retirement accounts follow their own rules based on account type.
Reviewing these thresholds and understanding how they apply during tax filing can help clarify what may be owed when a gain is realized. You can use this information as a foundation for evaluating how different investment decisions may affect future tax outcomes.
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