A guide to understanding capital gains tax rates, calculating gains and losses, reporting investment sales, and strategies for reducing your capital gains tax bill.
Identify your capital assets: stocks, bonds, mutual funds, real estate, collectibles
Almost everything you own for personal or investment use is a capital asset. Exceptions include inventory held for sale, accounts receivable, and certain self-created works. Your primary home is a capital asset but has special exclusion rules.
Determine the holding period: short-term (1 year or less) vs long-term (over 1 year)
The holding period starts the day after you buy and includes the day you sell. If you bought stock on March 15, 2025 and sold it on March 16, 2026, that's long-term. Selling on March 15, 2026 would be short-term — one day matters.
Know the tax rates: short-term gains are taxed as ordinary income; long-term gains at 0%, 15%, or 20%
For 2025, the 0% long-term rate applies to taxable income up to $48,350 (single) or $96,700 (joint). The 15% rate applies up to $533,400 (single) or $600,050 (joint). Above that, the 20% rate kicks in.
Check if the 3.8% Net Investment Income Tax (NIIT) applies
The NIIT applies to investment income when your MAGI exceeds $200,000 (single) or $250,000 (joint). This adds 3.8% on top of your capital gains rate. On a $50,000 long-term gain at the 15% rate, NIIT pushes the effective rate to 18.8%.
Calculate Your Gains and Losses
Determine the cost basis for each asset sold
Cost basis usually equals what you paid plus commissions and fees. For inherited assets, the basis is stepped up to fair market value at the date of death. For gifted assets, you generally use the donor's basis.
Account for adjustments to basis: reinvested dividends, stock splits, return of capital
Reinvested dividends increase your cost basis since you already paid tax on them. Forgetting to include reinvested dividends means paying tax twice on the same money. A $10,000 investment with $2,000 in reinvested dividends has a $12,000 basis.
Calculate gain or loss: sale proceeds minus adjusted cost basis
Include sales commissions and fees in your calculation. If you sold 100 shares at $50 ($5,000) with a $10 commission, your net proceeds are $4,990. Subtract your cost basis from $4,990 to get your gain or loss.
Separate transactions into short-term and long-term categories
Short-term and long-term gains and losses are reported separately on Schedule D. Net short-term gains and losses first, then net long-term gains and losses separately, before combining the results.
Apply the netting rules: offset gains with losses in each category first
Short-term losses offset short-term gains first. Long-term losses offset long-term gains first. Any remaining net loss from one category offsets the net gain in the other. This ordering matters because short-term gains are taxed at higher rates.
Report Capital Gains on Your Tax Return
Collect Form 1099-B from your brokerage showing all sales transactions
Form 1099-B arrives by mid-February. Brokerages often issue corrected forms through March, so wait until mid-March before filing if possible. Some mutual funds are notorious for late corrections.
Report each transaction on Form 8949, separating short-term and long-term
If your 1099-B shows the correct cost basis and the basis was reported to the IRS (Box A or D), you can skip Form 8949 and report totals directly on Schedule D. Otherwise, each transaction needs a separate line on Form 8949.
Transfer totals from Form 8949 to Schedule D
Schedule D summarizes all capital gains and losses. Part I covers short-term transactions and Part II covers long-term. The net result flows to Form 1040, Line 7 (or Schedule 1 if there's a net loss).
If you have a net capital loss, deduct up to $3,000 against ordinary income ($1,500 if married filing separately)
Unused capital losses carry forward indefinitely to future tax years. If you had $15,000 in net losses this year, you deduct $3,000 this year and carry forward $12,000. Track carryforwards carefully — the IRS doesn't do it for you.
Report collectibles gains (art, coins, wine) separately at the 28% maximum rate
Collectibles held over 1 year are taxed at a maximum rate of 28%, higher than the standard 15-20% long-term rate. This includes art, antiques, gems, stamps, coins, and certain precious metals. Report these on the 28% Rate Gain Worksheet.
Apply Special Rules
Claim the Section 121 exclusion when selling your primary home
Exclude up to $250,000 of gain ($500,000 for married filing jointly) if you owned and lived in the home for at least 2 of the last 5 years. You can use this exclusion once every 2 years. Gain above the exclusion is taxed at capital gains rates.
Be aware of the wash sale rule if you sell at a loss and rebuy within 30 days
If you sell a stock at a loss and buy the same or substantially identical stock within 30 days before or after the sale, the loss is disallowed. The disallowed loss is added to the basis of the replacement shares. This applies across all your accounts.
Report Section 1231 gains on business property separately
Business property held over 1 year (real estate, equipment) gets favorable treatment. Net Section 1231 gains are taxed at long-term capital gains rates, but net losses are treated as ordinary losses — deductible without the $3,000 limitation.
Check for unrecaptured Section 1250 gain if selling depreciated real estate
When you sell rental property, the portion of gain attributable to depreciation previously taken is taxed at a maximum rate of 25%, not the regular long-term rate. On a property where you claimed $30,000 in depreciation, that $30,000 is taxed at up to 25%.
Strategies to Reduce Capital Gains Tax
Hold investments for at least 1 year and 1 day to qualify for long-term rates
The difference between short-term and long-term rates can be substantial. On $50,000 of gain, a taxpayer in the 32% bracket saves $8,500 by waiting for long-term treatment (32% vs. 15%). Set calendar alerts for holding period milestones.
Harvest tax losses by selling losing positions to offset gains
Tax-loss harvesting involves selling investments at a loss to offset capital gains. If you have $20,000 in gains and sell $15,000 in losses, you're taxed on only $5,000. Watch the wash sale rule — wait 31 days before rebuying.
Use specific identification to choose which shares to sell
If you bought the same stock at different prices, you can tell your broker to sell specific lots. Selling the highest-cost shares first minimizes your gain. You must identify the specific shares at the time of sale, not after.
Consider a Qualified Opportunity Zone investment to defer or reduce gains
Investing capital gains in a Qualified Opportunity Zone fund defers the tax until 2026 or when you sell the QOZ investment. If you hold the QOZ investment for 10+ years, any appreciation in the QOZ investment is tax-free.
Donate appreciated assets to charity instead of selling them
Donating stock held over 1 year lets you deduct the full market value while avoiding capital gains tax entirely. On a $10,000 stock with a $2,000 basis, you avoid $1,200 in capital gains tax (at 15%) and get a $10,000 charitable deduction.
Frequently Asked Questions
What is the difference between short-term and long-term capital gains tax rates?
Short-term capital gains (assets held one year or less) are taxed as ordinary income at your regular tax bracket — anywhere from 10% to 37%. Long-term capital gains (assets held more than one year) get preferential rates of 0%, 15%, or 20% depending on your taxable income. For 2024, single filers pay 0% on long-term gains up to $47,025, 15% from $47,026 to $518,900, and 20% above that. The holding period starts the day after you buy and includes the day you sell.
Can capital losses offset ordinary income?
Yes, but with limits. Capital losses first offset capital gains dollar-for-dollar (short-term losses offset short-term gains first, then long-term). If your total capital losses exceed your total capital gains, you can deduct up to $3,000 of the excess against ordinary income per year ($1,500 if married filing separately). Any remaining losses carry forward indefinitely to future tax years. There is no limit on the amount you can carry forward. Tax laws change frequently — verify current rules with the IRS or a tax professional.
Do I owe the Net Investment Income Tax on capital gains?
High earners face an additional 3.8% Net Investment Income Tax (NIIT) on the lesser of their net investment income or the amount by which their modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). Net investment income includes capital gains, dividends, interest, rental income, and royalties. On a $100,000 long-term gain for someone with a $300,000 AGI, the NIIT adds $3,800 on top of the 15% long-term rate, bringing the effective rate to 18.8%.
How are inherited assets taxed for capital gains purposes?
Inherited assets receive a stepped-up basis to the fair market value on the date of the decedent's death. If your parent bought stock for $10,000 and it was worth $100,000 when they passed away, your cost basis is $100,000. If you sell immediately for $100,000, you owe zero capital gains tax. This stepped-up basis is one of the most significant tax benefits in the code. Gifted assets, by contrast, take the donor's original cost basis.
Are there ways to defer or avoid capital gains tax legally?
A 1031 exchange lets you defer capital gains on investment real estate by reinvesting proceeds into a like-kind property within 180 days. Qualified Opportunity Zone investments defer and partially reduce capital gains if held for 10+ years. Selling your primary residence excludes up to $250,000 in gains ($500,000 for married couples) if you lived there 2 of the last 5 years. Donating appreciated assets to charity avoids capital gains entirely and provides a deduction at fair market value. Tax-loss harvesting offsets gains with losses in the same year.