Capital gains tax in United States

Understanding how the United States taxes capital gains requires separating two fundamentally different rate systems: the preferential long-term rates that apply to assets held more than one year, and the ordinary income rates that apply to assets held one year or less. The distinction can reduce the federal tax on a given gain by as much as 17 to 20 percentage points, which is why the holding period is one of the most consequential variables in any capital-asset disposition.

What rate applies to short-term capital gains?

A net short-term capital gain -- from an asset held one year or less -- is taxed as ordinary income at the filer's applicable marginal rate, which ranges from 10 to 37 percent under the seven federal income tax brackets in effect for 2025 (Rev. Proc. 2024-40). [1] Because short-term gains stack on top of wages and other ordinary income, a high-bracket filer can pay the 37 percent top rate on a short-term gain that would attract only 15 or 20 percent if the holding period exceeded one year. The IRS defines "one year or less" strictly: an asset sold exactly 365 days after purchase is short-term; a sale on day 366 or later is long-term under IRC Section 1222.

What are the 2025 long-term capital gains rate brackets?

For tax year 2025 (returns filed in 2026), IRS Rev. Proc. 2024-40 sets the long-term capital gains brackets as follows, applied to taxable income by filing status. [1] The table below summarizes the three rates and income thresholds:

Bracket thresholds are inflation-adjusted each year. The rate applies to the long-term gain itself, not all taxable income -- only the portion of taxable income attributable to net long-term capital gains is taxed at these preferential rates. Ordinary income fills the lower brackets first; long-term gains are then stacked on top and taxed at the rate that corresponds to where they land in the bracket schedule.

What is the Net Investment Income Tax and when does it apply?

The Net Investment Income Tax (NIIT) under IRC Section 1411 is an additional 3.8 percent tax assessed on the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds applicable thresholds: $200,000 for single filers and heads of household, $250,000 for married filing jointly and qualifying surviving spouses, and $125,000 for married filing separately. [2] These thresholds are not adjusted for inflation and have remained fixed since the NIIT took effect in 2013.

Net investment income subject to the NIIT includes interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. [2] Capital gains excluded from income under Section 121 (the principal-residence exclusion) are also excluded from NIIT. Wages, unemployment compensation, Social Security benefits, and distributions from qualified retirement accounts are not net investment income and are therefore excluded from the NIIT base. Filers who owe NIIT must file Form 8960.

How does the Section 121 primary-residence exclusion work?

IRC Section 121 allows a single filer to exclude up to $250,000 of capital gain on the sale of a principal residence, and a married couple filing jointly to exclude up to $500,000. [3] Two tests must be satisfied during the five-year period ending on the date of sale: the ownership test (the seller owned the home for at least 24 months out of the five years) and the use test (the seller used the home as a principal residence for at least 24 months out of the five years). The two qualifying periods need not be the same 24-month window and need not be continuous.

A filer generally may not use the Section 121 exclusion more than once every two years. A partial exclusion is available when a sale before meeting the two-year tests is driven by a change in place of employment, a health-related reason, or unforeseen circumstances -- the exclusion is prorated by the fraction of the qualifying period completed. Depreciation taken on the property during periods of business or rental use is recaptured at a maximum 25 percent rate under Section 1250 and remains taxable even when the rest of the gain is excluded under Section 121. [3]

What special rates apply to collectibles and Section 1250 property?

Two categories of long-term capital gain face rates higher than the standard 0/15/20 percent schedule. First, gains from the sale of collectibles held more than one year -- including works of art, antiques, coins, stamps, metals such as gold and silver, and gems -- are taxed at a maximum 28 percent rate under IRC Section 1(h)(4). [1] For filers in the 10 or 12 percent ordinary-income brackets, the effective rate on collectibles gains is their actual bracket rate, not 28 percent; the 28 percent figure is a ceiling, not a floor.

Second, real property used in a trade or business generates depreciation deductions that reduce ordinary income during ownership. On sale, the gain attributable to depreciation previously allowed or allowable is unrecaptured Section 1250 gain, taxed at a maximum 25 percent rate. [1] The balance of any long-term gain above the depreciation recapture amount is taxed at standard long-term rates. Both the 28 percent collectibles rate and the 25 percent unrecaptured Section 1250 rate are applied in the Unrecaptured Section 1250 Gain Worksheet and the 28 Percent Rate Gain Worksheet in the Schedule D instructions.

How are capital losses deducted and carried forward?

Net capital losses offset net capital gains without limit in the same tax year. [1] When net capital losses exceed net capital gains, the excess offsets ordinary income up to $3,000 for single filers, married filing jointly, head of household, and qualifying surviving spouses -- and up to $1,500 for married filing separately. Net losses above that annual cap carry forward indefinitely to subsequent tax years, retaining their character as long-term or short-term. A filer who realizes a $20,000 net capital loss in 2025 may deduct $3,000 against 2025 ordinary income and carry $17,000 forward to 2026, applying the same rules in future years until the loss is exhausted.

The wash-sale rule under IRC Section 1091 limits loss harvesting. A sale at a loss followed by a purchase of the same or substantially identical security within 30 days before or after the sale date triggers disallowance of the loss; the disallowed amount is added to the basis of the replacement security and the original holding period carries over. The wash-sale rule applies across a filer's taxable accounts and extends to repurchases in a traditional or Roth IRA, where the disallowed loss is lost permanently rather than deferred.

For a plain-language overview of how the US federal tax system fits together, see the United States country overview. Filers dealing with stock options, restricted stock units, or carried interest may also benefit from reviewing US dividend and investment tax for the interaction of qualified-dividend rates with capital-gains brackets. Any filing that involves realized gains, loss carryforwards, or home-sale exclusions carries meaningful complexity; a credentialed tax professional familiar with your full financial picture is the appropriate resource before making disposition decisions.