What is capital gains tax?

Capital gains tax is the tax owed on the profit from selling a capital asset — a stock, real estate, business, or other investment. Short-term gains (assets held one year or less) are taxed as ordinary income; long-term gains (held more than one year) are taxed at lower preferential rates: 0%, 15%, or 20%, depending on income. Verify current-year rates at IRS.gov.

When you sell a capital asset for more than you paid for it (your cost basis), the profit is a capital gain. The IRS taxes capital gains — but the rate depends on how long you held the asset before selling. Long-term holding is rewarded with lower rates. See IRS Publication 544 (Sales and Other Dispositions of Assets) for the full rules. This is educational content; consult a tax professional for your specific situation.

Short-term vs. long-term capital gains

Short-term capital gains — assets held 1 year or less. Taxed as ordinary income at your regular marginal rate (10%–37%). No preferential treatment.
Long-term capital gains — assets held more than 1 year. Taxed at 0%, 15%, or 20%, depending on your taxable income and filing status. These rates are lower than most marginal income tax rates.
The holding period starts the day after you acquire the asset and ends on the day you sell it.

Long-term capital gains rates (2025 baseline — verify 2026 at IRS.gov)

IRS 2025 long-term capital gains rate thresholds (reference — verify current year)

0% rate applies to single filers with taxable income up to approximately $48,350; married filing jointly up to approximately $96,700 (2025 baseline). Verify 2026 thresholds at IRS.gov. — IRS — Topic No. 409, Capital Gains and Losses
15% rate applies to most middle-income taxpayers above the 0% threshold and below the 20% threshold. Verify 2026 thresholds at IRS.gov. — IRS — Topic No. 409
20% rate applies to high-income taxpayers (taxable income above approximately $518,900 for single filers / $583,750 for married filing jointly in 2025). Verify 2026 thresholds at IRS.gov. — IRS — Topic No. 409
An additional 3.8% Net Investment Income Tax (NIIT) may apply to capital gains for higher-income taxpayers (modified AGI above $200,000 for single filers / $250,000 for married filing jointly). — IRS — Questions and Answers on the Net Investment Income Tax

Primary home exclusion: up to $250,000 tax-free

If you sell your primary residence, you may exclude up to $250,000 of gain ($500,000 for married filing jointly) from federal capital gains tax — as long as you owned and lived in the home as your primary residence for at least 2 of the last 5 years before the sale. This exclusion cannot be used more than once every 2 years. See IRS Publication 523 (Selling Your Home) for full rules.

Capital losses can offset gains

If you sell an asset for less than your cost basis, you have a capital loss. Capital losses can offset capital gains dollar for dollar. If losses exceed gains, up to $3,000 per year in net capital losses can offset ordinary income (for single and married filing jointly). Any remaining losses carry forward to future tax years. See IRS Topic No. 409.

This is educational content, not tax advice

Capital gains tax rules involve holding periods, cost basis calculations, state taxes, and multiple exceptions. This page explains the federal framework. Consult a qualified tax professional before selling investments or real estate — especially if gains are large.

Key takeaways

Capital gains tax applies to profit from selling assets (stocks, real estate, business interests).
Short-term gains (≤ 1 year) are taxed as ordinary income at your marginal rate.
Long-term gains (> 1 year) are taxed at 0%, 15%, or 20% — lower than most income tax rates.
Primary home sales may exclude up to $250,000 ($500,000 married filing jointly) in gains if residency rules are met.
Capital losses offset gains; up to $3,000/year can offset ordinary income; excess carries forward.

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