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Qualifying for a personal loan when self-employed can present some challenges. Self-employed individuals may find it difficult to produce traditional documentation — such as W-2s or pay stubs — used to verify income. And their income may not be steady, as it is with 9-to-5 workers. But that doesn’t necessarily mean you’re out of luck if you’re seeking a quick infusion of cash. Here’s a look at some ways to get a personal loan when you’re self-employed.

How to Get a Personal Loan If You’re Self-Employed

A personal loan is a type of installment loan that can be used for nearly any personal expense, including home improvements, a vacation, or consolidating your credit card debt. If you’re considering making a big purchase, like buying an engagement ring, a personal loan can be an alternative to using a high-interest credit card when you don’t have the means to pay the balance off right away.

Personal loans are typically unsecured, meaning a lender won’t require collateral. However, they can also be secured, usually by the asset purchased with the loan. Unsecured loans are usually approved based on the financial standing and creditworthiness of the borrower.

In addition to looking at an applicant’s credit history, lenders will also typically consider a potential borrower’s income when deciding whether or not to approve a loan and, if so, what the rates and terms will be. Those who are self-employed may find it more difficult to show proof of income, especially if their income fluctuates from month to month and year to year.

Self-Employed Loan Requirements

Loan requirements for self-employed individuals will be similar to the typical loan requirements for any borrower as determined by the lender. In addition to evaluating factors like the applicant’s credit score, many lenders will require proof of income.

Typically, the requirements for personal loan approval include pay stubs and W-2s to verify income, which most self-employed people can’t provide. It is possible for self-employed individuals to show proof of income, but it may require a little more legwork, as you’ll learn below.

One point worth noting: In general, lenders are looking for borrowers who have income stability, and it can help if the borrower has been working in a single industry for at least two years. A shorter employment history as a freelancer could be seen as indicating that you are a borrowing risk.

Showing Proof of Income When Self-Employed

Those who are self-employed have a couple of options for showing a lender they have sufficient and reliable income. Here are a few options that self-employed individuals could provide as income documentation.

Tax statements: Self-employed individuals can use their tax returns from the prior two or three years to offer proof of income. These forms include your income earned and taxes paid for those tax years. Lenders often view tax documents as a reliable source of income proof because they are legal documents.

Bank statements: Bank statements could be used if there is a regular history of deposits that illustrate consistent income.

Profit and loss statement: If you own your own business, this document (called a P & L) provides an overview of your costs, expenses, and revenue.

Court-ordered agreements: These may include things like alimony or child support.

Keep in mind that each lender will likely have their own application requirements. Contact the individual lender if you have specific questions on the types of documentation they’ll accept.

Consider Having a Cosigner

In the event that you are still struggling to gain approval for a personal loan with your self-employed proof of income, one option is to consider adding a cosigner. A cosigner is someone who agrees to pay back the loan should you, the primary borrower, default on making payments.

A cosigner can be a close friend or family member, ideally one who has a strong credit history who will strengthen your loan application. Given that a cosigner’s responsibilities are significant, this is not an undertaking to enter into without considerable thought and trust.

Build Your Credit Score Before Applying

Before applying for a personal loan (or any loan, for that matter), it can be wise to check your credit score. If it’s not at least in the good range, you may want to wait to apply for your loan until you can positively impact your rating. In general, the higher your score, the lower the interest rate and more favorable the terms you’ll be offered.

Key ways to build your score include always making payments on time, keeping your credit usage low, having a good credit mix and long credit history, and not applying for too much credit in a short period of time.

Compare Lenders Who Work With Self-Employed Borrowers

As you look for a personal loan, you may want to do an online search for lenders who explicitly say they work with self-employed borrowers. These financial institutions are likely to have systems in place that tailor the process to those who don’t, say, have W-2s. This can make application and approval simpler.

Prepare a Strong Loan Application Package

In addition to gathering the necessary documentation for your application (as detailed above), also consider ways to strengthen your package for a loan as a self-employed person. These include making sure you keep your personal and business finances separate, so you can accurately reflect your financial situation. If you are going to have a cosigner on the loan, ask them to prepare their paperwork as well.

Understand and Avoid Predatory Lenders

As you hunt for a personal loan when self-employed, you may come across unscrupulous predatory lenders, which typically offer no-credit-check loans at exorbitant interest rates (into the triple digits) and with steep fees. Often, they state the interest rate in a way that doesn’t reveal just how high it is (say, they cite a weekly payment vs. the monthly payment most people are accustomed to). They may use high-pressure tactics, such as saying the offer is only good for a very limited time.

If you are struggling to get approved due to a low credit score or lack of steady income, these lenders may seem to offer you a solution. Beware: These predatory lenders can keep you trapped in a cycle of growing debt.

Recommended: Guarantor vs. Cosigner: What’s the Difference?

Why It’s Difficult for the Self-Employed to Get a Personal Loan

It can be more challenging for self-employed individuals to provide proof of income to lenders, which can make it more challenging for them to get approved for a personal loan. But it’s important to note that each loan application is unique, and employment status is just one consideration.

For example, a self-employed individual who has a stellar credit history and who has been self-employed for a few years may be in a better position to apply for a personal loan than someone who has just transitioned into managing their own business.

The Income Challenge

Proving consistent and stable income can be the biggest challenge when getting a personal loan as a self-employed individual. Because you may not be guaranteed the same payment each pay period, lenders may request specific documentation in order to verify the fact that you have enough cash coming in to make payments on the loan. Some lenders may request tax returns for several years in order to verify your income.

Consistency Matters

Consistency in income is another major hurdle when seeking a loan for the self-employed. It’s not uncommon for self-employed people to experience fluctuation in their income. While some slight fluctuation may be acceptable to a lender, for the most part they are looking for consistent payments getting deposited into your account, even better if there is an increasing trend over time.

Higher Scrutiny During the Underwriting Process

Self-employed borrowers will likely face a higher level of scrutiny during the underwriting process which precedes final loan approval. For instance, if you lack steady, predictable income, you may be asked for additional tax returns or banking documents. Or P&L sheets or letters from your accountant about your business income could be requested. This is because lenders typically view those who are self-employed as less creditworthy and more of a risk to default on a loan.

Personal Loan Alternatives When Self-Employed

Personal loans aren’t the only option for self-employed individuals looking to borrow money to pay for expenses. Personal loan alternatives to consider include a credit card, cash advance, or a home equity loan.

Credit Cards With 0% APR Promotions

Credit cards can have high-interest rates, but ones with a 0% APR promotion (aka a balance transfer card) could be a great tool to pay for an upcoming expense. Just be sure to pay off the credit card before the promotional period ends and interest starts accruing.

Recommended: Average Credit Card Interest Rates

Cash Advances

A cash advance is a short-term loan generally offered by your credit card which allows you to borrow cash against your existing line of credit. Cash advances can provide an avenue for you to get quick access to cash, but there may be additional fees and a higher interest rate than usual. Be sure to read all the terms and conditions outlined by your credit card company before borrowing a cash advance.

Home Equity Loans or HELOCs

If you are a homeowner, you may be able to tap into the equity you’ve built in your home using a home equity loan or home equity line of credit (HELOC). A home equity loan is an installment loan where the borrower receives a lump sum payment and repays it in regular payments with interest.

A HELOC, on the other hand, is a revolving line of credit that the borrower can draw from and, once it is repaid, continue drawing from during a specified period of time.

Business Loans

Small business loans can be used to pay for business expenses. Self-employed individuals may be able to qualify for loans backed by the U.S. Small Business Administration (SBA), as well as private small business loans offered by banks, credit unions, and online lenders.

It is important to keep your personal and business expenses separate as a self-employed person. If you are using the money for a personal expense, you’ll want to avoid borrowing a business loan. Also keep in mind that many lenders don’t allow you to use personal loans for business expenses.

Peer-to-Peer Lending

Peer-to-peer lending bypasses the usual financial institutions and allows companies and individuals to invest in others via loans. You may have heard of some of the popular platforms, such as Kiva, Upstart, and Lending Club. These may be more accommodating for self-employed borrowers who are finding it challenging to secure a loan.

Secured Personal Loan

While most personal loans are unsecured, meaning they are approved based on the applicant’s creditworthiness, some of them are secured, meaning they are backed by an asset, known as collateral. Since these secured loans involve collateral, they are considered less risky. If the borrower defaults, the lender knows they can seize an asset that can help them recoup what is owed. Typical examples of collateral for personal loans include real estate, vehicles, cash in a bank or investment account, and other items of value.

The Takeaway

The challenge for self-employed individuals applying for a personal loan will generally be providing proof of income. Alternatives to traditional proof of income documents include tax or bank statements. Fortunately, many lenders understand that a full-time job isn’t the only qualifier of financial stability and will also consider factors like your credit score, financial history, and whether you have a cosigner.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Can you get any loans if you’re self-employed with no proof of income?

It is possible to get a loan if you are self-employed. However, with zero proof of income, it may be challenging to gain approval for a loan. To improve your odds of approval, you may consider adding collateral to the loan or applying with a cosigner.

Are there any loans for self-employed people with bad credit?

While a strong credit history can help strengthen a loan application, it’s not impossible to qualify for a loan with bad credit. If you can show a consistent and stable income history, that could help improve your application. You’ll likely pay a higher interest rate and enjoy less favorable terms than if your score were higher, however. Another option to qualify could be to add a cosigner.

Can self-employed freelance workers get personal loans?

Yes, self-employed freelance workers can qualify for a personal loan. Instead of providing W-2 documents to verify their income, they will need to provide alternatives such as tax documents or bank statements. Applicants who have been working in a specific industry as a freelancer for two years or more may be viewed more favorably by lenders.

What documents do self-employed borrowers need to apply for a loan?

To apply for a personal loan, a self-employed person should probably gather tax returns, bank statements, profit and loss statements, and any documentation of other income sources (such as alimony). If you are working with a cosigner, they will also need to gather their documentation.

How can self-employed people improve their chances of getting approved for a loan?

Ways that a self-employed person can improve their chances of personal loan approval include building your credit score, working with lenders who specialize in loans for the self-employed, and considering whether to add a cosigner.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-064

For most Americans, having a car is a necessity to get to work, school, the supermarket, the doctor, and everywhere else. However, both new and used cars are expensive — and auto loan rates can be considerable, too.

So when buying a car, does it ever make sense to use a personal loan instead of traditional financing? Here, you’ll learn the difference between personal loans and car loans and when you might want to use each to buy a new set of wheels.

Personal Loan vs Auto Loan: An Overview

You can use a personal loan for almost any legal purpose, including buying a car. (Typically, though, you cannot use personal loans for business purposes or for tuition.) But why would you use a personal loan to purchase a vehicle when there are very specific loans — auto loans — to finance this purchase?

As you’ll see, personal loans can offer some benefits over car loans, including less buyer risk, no down payment needed, better negotiating power, and potential savings on car insurance. But car loans still have their place and may be cheaper in the long run.

Personal Loans

A personal loan allows you to borrow money from a bank, credit union, or lender to fund nearly any kind of purchase. People commonly use personal loans for debt consolidation, home renovations, weddings, vacations, and even new and used car purchases.

Personal loans can be unsecured (no collateral required) or secured (collateral required). For the sake of our personal loan vs. auto loan comparison, we’ll be looking at unsecured personal loans, as they’re more common.

How Interest Rates Work on Personal Loans

Because unsecured personal loans aren’t backed by any collateral, interest rates tend to be higher than what you’d get for a car loan. Average personal loan interest rates vary depending on your credit score and the loan terms. As of November 2025, the average rate was 12.25%, and these loans tend to max out at a rate of about 36%.

Most personal loans come with fixed rates, meaning your interest rate will stay the same over the life of the loan. It is possible, however, to get a variable-rate personal loan. Check out options for a fixed- vs. variable-rate loan to figure out which is right for you.

Terms for Personal Loans

Terms for personal loans vary by lender, but you can typically take out a loan with a repayment term of one to seven years. The faster you pay it off, the less you’ll pay in interest — but your monthly payments will be larger.

When Personal Loans Make Sense

A personal loan can be useful in many scenarios, including:

•   For debt consolidation. If you have several debts (say, balances on a couple of high-interest credit cards), you could pay them off with a single personal loan, simplifying your financial life since you only need to make one monthly payment. What’s more, the personal loan may charge a lower interest rate.

•   Unexpected major bills. If you get hit by a big medical, dental, or car repair bill and can’t cover it with emergency fund savings, a personal loan could be used for financing.

•   Home renovations. If you need to replace your hot water heater or want to renovate a dated bathroom, a personal loan can be an option that doesn’t require tapping your home equity or using your property as collateral.

•   Major purchases. When it’s time to get a new laptop or a used car, a personal loan could be the right option.

•   Pricey life events. Maybe you’re getting married or planning a big vacation for your whole family. A personal loan can help you afford this kind of big-ticket, memorable experience.

Recommended: Types of Personal Loans

Car Loans

When buying a new or used car through a dealership, the dealer’s finance department can help you find a loan through a bank or credit union. Alternatively — or when buying from a private seller — you can shop around for a car loan from various banks and credit unions on your own.

Auto loans are usually secured loans, meaning the car you’re buying serves as collateral. This means that if you fall behind on payments, the lender can repossess your car. (It’s possible, but less common and more expensive, to get a car loan without putting the car up as collateral.)

An important note: For tax years 2025 to 2028, interest paid on a car loan can now be deducted on your federal tax return, up to $10,000 annually, even if you take the standard deduction. The loan must be for new cars assembled in the U.S. and used for personal purposes only. The deduction phases out for taxpayers with a MAGI (modified adjusted gross income) over $100,000 per year.

How Interest Rates Work on Car Loans

The collateral on the car loan reduces the risk to the lender, which usually results in a lower interest rate. As of mid-2025, the average car loan interest rate for a new car was 6.73% and 11.87% for a used car. That said, auto loan interest rates depend on your credit score. You can use an online auto loan calculator to get a better idea of how different rates and terms compare.

Car loan rates for both new and used cars have increased in recent years, but they’re still typically lower than the average personal loan rate. Notably, car loan refinancing rates are lower than regular financing rates.

Terms for Car Loans

Like personal loans, car loans might stretch 84 months (that’s seven years), but some are as short as 24 months (two years). Also like personal loans, it’s common to repay your car loan over three to five years.

When Car Loans Make Sense

There are several scenarios when getting an automobile loan can make good sense:

•   You lack the cash to buy a car. For many people, cars are necessities to get to work, school, and run errands that are necessary for daily life. A car loan can enable the purchase of a car when you don’t have the funds to pay upfront.

•   You want to protect your savings. Perhaps you do have enough money in the bank to buy a car, but you’d rather save it for a goal like buying a house. Getting a loan can be a good option in this case.

•   You have a good, very good, or exceptional credit score. Typically, the higher your credit score, the lower your interest rate on a loan. If you have a solid score, a personal loan may offer a relatively affordable avenue to financing.

•   You want to build your credit history. Securing a loan and making on-time payments every month can positively impact your credit score.

Can You Use a Personal Loan to Buy a Car?

Yes, you can use a personal loan to buy a car. In fact, you can use a personal loan for (almost) any legal purpose (though typically not for business expenses or tuition, as mentioned above). However, it often makes more sense to get traditional vehicle financing when buying a car.

Recommended: Personal Loan Calculator

Is It Better to Get a Personal Loan to Buy a Car?

In some ways, it can be better to buy a car with a personal loan. You don’t have to stress about saving up for a down payment, there’s no risk of your car being repossessed, and you might even have more negotiating power at the dealership.

However, many buyers prefer the structure of an auto loan. These loans tend to be cheaper in the long run because of the lower interest rates. And they’re easier to get — both because of lower credit score requirements for car loans and because dealerships can help you find the best car loan for you.

Key Differences Between Personal Loans and Car Loans

Here’s a summary of the key ways that personal loans and auto loans differ when you’re shopping for a new car.

Secured vs Unsecured Debt

As noted above, a car loan is secured by the vehicle. When you use an auto as collateral in this way, the loan is less risky for the lender and therefore the interest rate is typically lower. However, you do run the risk of losing your car (that is, having it repossessed) if you default on the loan.

A personal loan, on the other hand, is unsecured, meaning it’s not backed by an asset. For this reason, the rate is typically somewhat higher but you don’t face the possibility of losing your property if you don’t pay the loan.

Vehicle Ownership and Title

With an auto loan, the lender typically holds onto the title until the loan is fully paid off. However, with a personal loan, you usually buy the car with the funds provided and take ownership and title right away. This quicker path to holding the title may appeal to some borrowers.

Loan Approval and Credit Score Considerations

Because a car loan is a secured loan, it carries less risk to the lender. That means the lender may approve a loan for a borrower with a lower credit score vs. what’s required for a personal loan.

Pros & Cons: Personal Loan vs Car Loan

Buying a car with a personal loan instead of an auto loan has its share of advantages, but there are also drawbacks to consider. Once you know these, you can decide whether a personal loan is right for you or if you should use an auto loan as an alternative to a personal loan.

Pros

First, the upsides of using a personal loan:

•   Less risk: When you take out a car loan, the car itself serves as collateral for the loan. If you miss enough payments, the lender could repossess your vehicle. With an unsecured personal loan, you don’t face that risk, though there are still consequences if you default on a personal loan.

•   More negotiating power: When you don’t have to go through the hassle of securing financing, the car buying process is much easier and faster for you and the dealer. That means you might be able to negotiate a better deal, like a discount for paying in full.

•   Lower insurance costs: When financing a car, the lender may require you to carry comprehensive, collision, and gap insurance. But when you pay for the vehicle outright with the funds from your personal loan, no one can require you to carry those car insurance coverages, just what is dictated by your state law.

•   No need to save for a down payment: Personal loans don’t require a down payment. Though some have origination fees, you might even be able to roll those into the cost of the loan. That means you could use a personal loan to get a car with no money down.

Cons

Next, review the potential downsides of using a personal loan to buy a car:

•   Higher cost: Interest rates are typically higher for personal loans, which means you’ll end up spending more money on your car in the long run than you would if you got traditional auto financing. Origination fees for personal loans may also be higher than they are for car loans.

•   Higher credit score requirements: Because auto loans are secured by the vehicle being financed, lenders are a little more willing to work with lower credit scores. The credit score you need for a personal loan is typically higher (usually in the good range), though this varies by lender.

•   More insurance risk: There may not be an auto lender requiring you to carry comprehensive, collision, or gap insurance. However, declining those coverages just because your personal loan lender doesn’t mandate them could open you up to considerable risk. If your car is totaled and you don’t have the proper coverage to get reimbursed, you’ll still be on the hook for making your personal loan payments — so think carefully before minimizing your car insurance coverage.

The Takeaway

Both auto loans and personal loans can help you get behind the wheel of a new (or used) car. Determining which type of loan is right for you comes down to your needs, preferences, and financial profile.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it easier to get a personal loan or car loan?

Getting a car loan is usually easier than getting a personal loan. That’s because car loans are secured by the vehicle you’re buying. That means less risk to the lender, who will be willing to accept lower credit scores.

Should I take out a personal loan to buy a car?

It depends. While you can get an auto loan through a bank, credit union, or the dealership, you can also pay for a car with a personal loan. Personal loans reduce your risk — there’s no chance of your car being repossessed — and they may give you more negotiating power. However, personal loans typically cost more in the long run.

Am I allowed to use a personal loan to buy a car?

Yes, you can use a personal loan to buy a new or used car. In fact, you can use personal loans for just about any legal purpose (though usually not for business expenses or tuition). Just read the fine print of any loan agreement to make sure.

Which loan type typically offers better interest rates?

When comparing auto loans and personal loans, an auto loan usually has somewhat lower interest rates since it’s a secured loan vs. an unsecured loan. However, that also means that with a vehicle loan, you risk possible repossession of the auto (the collateral) if you default. With an unsecured personal loan, there’s no asset that the lender could lay claim to if you don’t make payments.

What are the risks of using a personal loan to buy a car?

The risks of using a personal loan to buy a car can include higher costs (interest rates and origination fees may be higher than for auto loans), which means your monthly payment may be steeper. Also, there can be higher credit requirements for approval, and if you fail to make timely payments, your credit score will likely be negatively impacted.

Photo credit: iStock/skynesher

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-063

What Is Capital Gains Tax?

Capital gains are the profits investors may see from selling investments and other assets, like stocks, bonds, properties, vehicles, and so on. Capital gains tax doesn’t apply when you own these assets — it only applies when you profit from selling them, and the gain has to be reported to the IRS.

Short-term capital gains (from assets you’ve held for a year or less) are taxed at a higher marginal income tax rate. Long-term capital gains, which apply to assets you’ve held for more than a year, are taxed at the lower capital gains rate.

Other factors can affect an investor’s tax rate on gains, including: which asset you’re selling, your annual income, as well as your filing status. Capital gains tax rates typically change every year. Here, we’ll cover 2025 capital gains tax rates (for returns filed in 2026), and 2026 rates (for returns filed in 2027). Investment gains may also be subject to state and local taxes, as well.

Capital Gains Tax Rates Today

Capital gains and losses result from selling assets. Capital gains occur when the asset is sold for more than its purchase price. A capital loss is when an investor sells an asset for less than its original value.

How long you hold an investment before selling it 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.

Capital gains tax applies to investments that are sold when you’re investing online or through a traditional taxable brokerage; again, appreciated assets are not taxed until they’re sold. Gains may also be subject to state and local tax.

With a tax-deferred retirement account, such as an IRA or 401(k), you don’t pay any capital gains; you do owe income tax on withdrawals, however.

Other Capital Gains Tax Rules

Certain investments are subject to capital gains even if you don’t sell those securities. For example, a dividend-paying stock can produce a taxable gain because dividends are a type of income.

Taxes on qualified dividends are paid at long-term capital gains rates. Taxes on ordinary dividends are taxed at the marginal income tax rate, the same as short-term gains. Because the long-term capital gains tax rate is lower than the marginal income tax rate, qualified dividends are generally preferred vs. ordinary dividends.

Again, if divided-paying investments are held in a tax-advantaged account, those dividends are also tax deferred.

Capital Gains Tax Rates for Tax Year 2025

Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates apply to gains from an asset sold after one year, and fall into three brackets: 0%, 15%, and 20%.

Long-Term Capital Gains Rates, 2025

The following table shows the long-term capital-gains tax rates, by income bracket and filing status, for the 2025 tax year, according to the IRS.

Long-Term Capital Gains Tax Rates, 2026

The following table shows the long-term capital gains tax rates for the 2026 tax year by income and filing status, according to the IRS.

Recommended: Stock Market Basics

Short-Term Capital Gains Tax Rates for Tax Year 2025

The short-term capital gains are taxed as regular income at the “marginal rate,” so the rates are based on the federal income 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.

2025 Short-Term Capital Gains Tax Rates

Here’s a table that shows the federal income tax brackets for the 2025 tax year, which are used for short-term gains, for tax returns that are usually filed in 2026, according to the IRS.

Short-Term Capital Gains Tax Rates for Tax Year 2026

This table shows the federal marginal income tax rates for tax year 2026, which apply to short-term capital gains (for tax returns that are usually filed in 2027).

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 tax-advantaged accounts like 401(k) plans, 529 college savings accounts, or when you open an IRA. 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.

Single homeowners also get a tax exclusion on the first $250,000 in profit 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.

Tax-Loss Harvesting

Tax-loss harvesting is another way to potentially save money on capital gains. Tax-loss harvesting is the strategy of selling some investments at a loss to offset the tax on 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 ordinary 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. This is known as a tax-loss carryforward.

Understanding the Wash-Sale Rule

While it may be useful in some cases to sell securities in order to harvest losses, it’s important to know about something called the wash-sale rule.

Per the IRS, the wash-sale rule states that if an investor sells an investment for a loss, then buys the same or a “substantially identical” asset within 30 days before or after the sale, they cannot use the original loss to offset capital gains or ordinary income and claim the tax benefit.

The wash-sale rule sounds straightforward, but the details are complicated. If you plan to sell securities at a loss in order to claim the tax benefit, you may want to consult a professional.

Recommended: Is Automated Tax-Loss Harvesting a Good Idea?

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 highest 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.

Comparison to Capital Gains Taxes in Other Countries

In 2025, the Tax Foundation listed the capital gains taxes of the 35 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 37.8%. The Netherlands were third on the list, at 36%. In addition, the following European countries all levied higher capital gains taxes than the U.S. (listed in order from the highest to lowest rate): Finland, France, Ireland, Sweden, Spain, Latvia, Austria, Germany, Italy, Czech Republic, and Iceland.

Comparing 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. 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%.

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 a year or less (for short-term gains), or more than a year (for long-term gains). 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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FAQ

Why is capital gains tax important?

When investors decide how long to hold investments, it’s a complex decision. Given that long-term capital gains rates are more favorable, some investors may want to hold onto their profitable investments for at least a year to get the lower rate.

Can you pay zero capital gains tax?

If you meet certain income criteria, yes. The lowest capital gains rate of 0% applies if your taxable income for tax year 2025 is equal to or less than $94,050 (married filing jointly); $47,025 (single, married filing separately, qualifying surviving spouse); and $63,000 for head of household. For tax year 2026, the 0% rate applies if your taxable income is equal to or less than $98,900 (married, filing jointly); $49,450 (single, married filing separately, qualifying surviving spouse); $66,200 (head of household).

Can capital losses reduce personal income tax?

In some cases yes: If your capital losses for a given year exceed your capital gains, you can deduct up to $3,000 in losses from your ordinary income (married, filing jointly; $1,500 if you’re married, filing separately). Losses can be applied to future capital gains or to income, in what’s known as a tax-loss carryforward.