What Is Capital Gains Tax?
Capital gains taxes are the taxes you pay on any profits you make from selling investments, like stocks, bonds, properties, cars, or businesses. The tax isn’t applied for owning these assets — it only hits when you profit from selling them.
It’s important for beginner investors to understand that a number of factors can affect their capital gains tax rate: how long they hold onto an investment, which asset they’re selling, the amount of their annual income, as well as their marital status.
Read on to learn how capital gains work, the capital gains tax rates, and tips for lowering capital gains taxes.
Capital Gains Tax Rates Today
Whether you hold onto an investment for at least a year can make a big difference in how much you pay in taxes.
When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
Short-Term Capital Gains Tax Rates (for Tax Year 2023)
The short-term capital gains tax is taxed as regular income or at the “marginal rate,” so the rates are based on what tax bracket you’re in.
The Internal Revenue Service (IRS) changes these numbers every year to adjust for inflation. You may learn your tax bracket by going to the IRS website, or asking your accountant.
Here’s a table that breaks down the short-term capital gains tax rates for the 2023 tax year, or for tax returns that are filed in 2024.
| Marginal Rate | Income — Single | Married, filing jointly |
|---|---|---|
| 10% | Up to $11,000 | Up to $22,000 |
| 12% | $11,000 to $44,725 | $22,000 to $89,450 |
| 22% | $44,725 to $95,375 | $89,450 to $190,750 |
| 24% | $95,375 to $182,100 | $190,750 to $364,200 |
| 32% | $182,100 to $231,250 | $364,200 to $462,500 |
| 35% | $231,250 to $578,125 | $462,500 to $693,750 |
| 37% | $578,125 or more | More than $693,750 |
Long-Term Capital Gains Tax Rate By Income for Tax Year 2023 (or Tax Season 2024)
Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates fall into three brackets: 0%, 15%, and 20%.
The following table breaks down the long-term capital-gains tax rates for the 2023 tax year by income and status.
| Capital Gains Tax Rate | Income — Single | Married, Filing Separately | Head of Household | Married, Filing Jointly |
|---|---|---|---|---|
| 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% | $492,301 or more | $276,901 or more | $523,051 or more | $553,851 or more |
A higher 28% is applied to long-term capital gains from transactions involving art, antiques, stamps, wine, and precious metals.
Additionally, individuals with modified adjusted gross incomes (MAGIs) over $200,000 and couples filing jointly with MAGIs over $250,000 — who have net investment income, may have to pay the Net Investment Income Tax (NIIT), which is 3.8% on the lesser of the net investment income or the excess over the MAGI limits.
Tips For Lowering Capital Gains Taxes
Hanging onto an investment for more than a year can lower your capital gains taxes significantly.
Capital gains taxes also don’t apply to so-called “tax-advantaged accounts” like 401(k) plans, IRAs, or 529 college savings accounts. So selling investments within these accounts won’t generate capital gains taxes. Instead, traditional 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529 plans are tax-free.
Recommended: Benefits of Using a 529 College Savings Plan
Single homeowners also get a break on the first $250,000 they make from the sale of their primary residence, which they need to have lived in for at least two of the past five years. The limit is $500,000 for a married couple filing jointly.
For new investors, it might be helpful to know that you may deduct as much as $3,000 in losses from an investment to help offset the amount of taxes on your income.
How US Capital Gains Taxes Compare
Generally, capital gains tax rates affect the wealthiest taxpayers, who typically make a bigger chunk of their income from profitable investments.
Here’s a closer look at how capital gains taxes compare with other taxes, including those in other countries.
Compared to Other Taxes
The maximum long-term capital gains taxes rate of 20% is lower than the highest marginal rate of 37%.
Proponents of the lower long-term capital gains tax rate say the discrepancy exists to encourage investments. It may also prompt investors to sell their profitable investments more frequently, rather than hanging on to them.
Comparison to Capital Gains Taxes In Other Countries
In 2023, the Tax Foundation listed the capital gains taxes of the 27 different European Organization for Economic Cooperation and Development (OECD) countries. The U.S.’ maximum rate of 20% is roughly midway on the spectrum of comparable capital gains taxes.
In comparison, Denmark had the highest top capital gains tax at a rate of 42%. Norway was second-highest at 37.84%. Finland and France were third on the list, both at 34%. In addition, the following European countries all levied higher capital gains taxes than the U.S. (listed in order from highest to lowest): Ireland, the Netherlands, Sweden, Portugal, Austria, Germany, Italy, Spain, and Iceland.
Compared With Historical Capital Gains Tax Rates
Because short-term capital gains tax rates are the same as those for wages and salaries, they adjust when ordinary income tax rates change. For instance, in 2018, tax rates went down because of the Trump Administration’s tax cuts. Therefore, so did short-term capital gains rates.
As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 20% started in 2013.
For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.
Going back in time, in the 1920s the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high, at around 28%, in the late 1980s and 1990s. Then, between 2004 and 2012, they dropped to 15%.
💡 Quick Tip: Did you know that investment losses aren’t necessarily bad news? Some losses can be used to offset gains, potentially reducing how much tax you owe. Learn more about investment taxes.
Tax Loss Harvesting
Tax loss harvesting is the strategy of selling some investments at a loss to offset the taxable profits from another investment.
Using short-term losses to offset short-term gains is a way to take advantage of tax loss harvesting — because, as discussed above, short-term gains are taxed at higher rates. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.
Investors can also apply losses from investments of as much as $3,000 to offset income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year.
Recommended: Is Automated Tax Loss Harvesting a Good Idea?
The Takeaway
Capital gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year to adjust for inflation.
It’s important for investors to know that capital gains tax rates can differ significantly based on whether they’ve held an investment for at least a year. An investor’s income level also determines how much they pay in capital gains taxes.
An accountant or financial advisor can suggest ways to lower your capital gains taxes as well as help you set financial goals.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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