The US rewards long-term investors with preferential tax rates — assets held more than a year qualify for long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income tax rates. The difference can be enormous: selling $100,000 of appreciated stock after 11 months versus 13 months can save over $10,000 in tax.
Short-Term vs Long-Term: The One-Year Rule
- Short-term capital gains (STCG): Assets held 12 months or less. Taxed as ordinary income at your regular bracket rates (10%–37%).
- Long-term capital gains (LTCG): Assets held more than 12 months. Taxed at 0%, 15%, or 20% depending on your income.
Holding an asset for one day more than a year can therefore be a meaningful financial decision. The day of purchase doesn't count, but the day of sale does.
2025 Long-Term Capital Gains Tax Rates (Single Filers)
| Taxable Income (Single) | LTCG Rate |
|---|---|
| $0 – $48,350 | 0% |
| $48,351 – $533,400 | 15% |
| Over $533,400 | 20% |
For MFJ: 0% up to $96,700 | 15% up to $600,050 | 20% above. "Taxable income" includes the capital gain itself.
The 0% Rate: Who Qualifies?
If your total taxable income (including the gain) stays below $48,350 (single 2025), your long-term capital gains are taxed at zero. This is a remarkable opportunity that many people overlook:
- Retirees with modest income and appreciated stocks can potentially sell and pay no federal CGT.
- Lower-income earners in a good year can strategically "harvest" gains at 0%.
- Family members who are in the 0% bracket (college students with part-time income, retired parents) can be gifted appreciated assets to sell.
Net Investment Income Tax (NIIT)
High earners face an additional 3.8% surtax on investment income above $200,000 (single) / $250,000 (MFJ). The NIIT applies to the lesser of (a) net investment income or (b) the excess of modified AGI over the threshold. Net investment income includes:
- Capital gains (short-term and long-term)
- Dividends and interest
- Rental income
- Passive business income
So for a high earner, the effective federal CGT rate is 23.8% (20% LTCG + 3.8% NIIT). Adding state tax (California's 13.3% treats all capital gains as ordinary income), the total can exceed 37%.
Worked Example — $90,000 Salary + $50,000 LTCG (Single)
Ordinary Income: $90,000
LTCG: $50,000
Total Income: $140,000
After standard deduction ($15,750):
Ordinary taxable income: $90,000 − $15,750 = $74,250
LTCG: $50,000 (taxed separately at LTCG rates)
LTCG Calculation:
Total taxable income = $74,250 + $50,000 = $124,250 → above $48,350 threshold, so 15% applies to the LTCG.
LTCG Tax: $50,000 × 15% = $7,500
CGT = $7,500 (vs ~$11,000 STCG at 22% ordinary income rate)
Tax-Loss Harvesting
You can sell losing investments to offset gains, reducing your CGT bill. Rules:
- Capital losses first offset same-type gains (STCL against STCG, LTCL against LTCG). Excess losses then offset the other type.
- Up to $3,000 of net capital losses can offset ordinary income per year.
- Unused losses carry forward indefinitely to future tax years.
- Wash sale rule: You can't repurchase the same or "substantially identical" security within 30 days before or after the sale. Violation disallows the loss.
Qualified Opportunity Zones
Investing capital gains into a Qualified Opportunity Fund (QOF) within 180 days of realising a gain can defer and partially reduce the CGT. Gains from the QOF investment itself are excluded if held 10+ years. A strategy worth exploring for large, concentrated gains.
Calculate your US capital gains tax
Open Capital Gains Calculator →Source: IRS Rev. Proc. 2024-40, Publication 550. Tax Year 2025. Not investment or tax advice.