If you sell an asset at a profit, you’ve generated a capital gain. Does that mean you will owe the IRS capital gains taxes on that profit? Maybe. And if you do, what rate will apply? It depends.
Capital gains taxes are far from the most complex component of the tax code, but they do vary based on factors such as how long you owned the asset and how much income you had during the year. Good news: Many taxpayers qualify for an unbeatable 0% long-term capital gains tax rate.
Here’s what you need to know about both long-term and short-term capital gains tax rates…along with seven potential strategies for cutting capital gains taxes…from Bottom Line’s tax expert Maryann Reyes, CPA …
Long-term capital gains tax rates typically apply when an asset is owned for more than one year before it’s sold…and they are lower than their short-term cousins (see below).
If you’re married…file your tax return jointly…and your taxable income for the year (2025) is below $96,700* (including the capital gains), you’ll qualify for that 0% long-term capital gains tax rate mentioned above. That means you won’t have to pay taxes on your long-term capital gains at all.
Single taxpayers and married taxpayers who file separately qualify for the 0% long-term capital gains tax rate if their taxable income for 2025 is below $48,350.
Note: These tax thresholds are based on taxable income, which usually is significantly lower than total income. A married couple filing jointly might qualify for the 0% rate even though their total household income for the year lands in the low six figures.
If your income is too high to qualify for that 0% rate, you’ll likely face a long-term capital gains tax rate of 15%—which applies if you’re married filing jointly with taxable income between $97,701 and $600,050…or single with taxable income between $48,351 and $533,400…or married filing separately with taxable income between $48,351 and $300,000. If your taxable income is above even these upper limits, your capital gains tax rate is 20%.
Short-term capital gains taxes apply when you own an asset for one year or less and then sell it. Short-term capital gains taxes don’t have their own tax rates and brackets. Instead, they are taxed at the taxpayers’ ordinary income tax rate, which is between 10% and 37% depending on his/her taxable income.
Note: Some high-earners must pay a 3.8% net investment income tax (NIIT) on their investment profits on top of the long- and short-term capital gain taxes described above. NIIT affects taxpayers whose Modified Adjusted Gross Income (MAGI) exceeds $250,000 if married filing jointly…$200,000 if single…or $125,000 if married filing separately.
Worth noting: Capital gains taxes and NIIT apply only to the profit generated by selling an asset, not to the total sale price of that asset. Example: If a share of stock is purchased for $100 and later sold for $110, only $10 is subject to capital gains taxes, not the full $110.
There are a number of ways to potentially reduce capital gains tax bills—some simple and straightforward…others complex and/or useful only in specific circumstances…
Long-term capital gains taxes tend to be substantially lower than short-term capital gains taxes, so consider hanging onto highly appreciated assets until they’ve been held at least one year and one day.
Each December, calculate roughly where your taxable income is likely to land for that year. If you’re below the upper threshold of the 0% long-term capital gains tax bracket, consider locking in the 0% tax rate by selling some highly appreciated assets that you’ve held for more than a year before December ends. Caution: The capital gains realized by the sale of these appreciated assets will themselves count toward your taxable income for the year, so take care not to realize so much profit that you accidentally push yourself into the 15% long-term capital gains tax bracket. Helpful: This strategy is especially beneficial for taxpayers whose taxable income lands near or above the top of the 0% bracket in most years. But there’s little upside to it if you’re comfortably within the 0% bracket every year.
Real estate values have skyrocketed in many parts of the US in recent years, but it’s often possible to avoid paying capital gains taxes on some or all the profits from the sale of a home. Married taxpayers who file their tax returns jointly are allowed to exclude up to $500,000 in capital gains on the sale of their home…single taxpayers and married taxpayers who file separately, up to $250,000. That’s a tremendously valuable tax break but be sure to understand its rules and limits so you don’t miss out.
Most notably, you can claim this tax exclusion only if the home has served as your primary residence and you’ve owned it for at least two of the most recent five years…and only if you haven’t already taken this exclusion on a different home within the prior two years. Fortunately, with a little planning it’s usually possible to clear these hurdles and time home sales so they qualify.
In fact, it’s sometimes possible to claim this exclusion when selling a vacation home even though the exclusion officially applies only to primary residences—the key is to use that vacation home as your primary residence for at least two years before selling. See IRS Publication 523, Selling Your Home, for additional details.
Helpful: Widows and widowers can qualify for the full $500,000 exclusion even if they’re no longer filing their taxes jointly as a married couple after their late spouse’s death—but only if they sell the home within two years following that death, so it’s important not to put off this home sale too long.
It’s possible to postpone paying capital gains taxes on the sale of investment real estate using a process known as a 1031 exchange, whereby you promptly use the proceeds from the sale to purchase another similar, investment property, The rules of 1031 exchanges are complex, and the deadlines inflexible, so it is best to work with a “qualified intermediary” if you decide to pursue this option. Warning: It’s not possible to do a 1031 exchange with the family home or other non-investment real estate.
If your financial plan for the year includes making a donation to a nonprofit, consider giving highly appreciated investments to that charity rather than writing a check. When you donate appreciated investments to charity, you don’t have to pay long-term capital gains taxes on those investments…and you’re allowed to treat the full value of the investments as a deductible donation. Helpful: This strategy makes particular sense for taxpayers whose income is too high to qualify for the 0% long-term capital gains tax rate and who itemize their taxes rather than claim the standard deduction. If you claim the standard deduction, you can’t deduct charitable donations.
Capital gains taxes are imposed on a taxpayer’s net investment profit for the year. If you sell assets that have declined in value, the resulting capital loss can be used to offset capital gains that you’ve realized from more successful investments. In fact, if you realize more capital losses than you have capital gains during a year, you can use up to $3,000 ($1,500 if married filing separately) of excess losses to offset your ordinary income, further reducing your tax bill. Any additional losses can be carried over and used to offset gains in future years.
Warning: If you sell investments that have declined in value with the intention of creating a capital loss that will offset your taxable capital gains, don’t repurchase that same investment or purchase a “substantially identical” investment during the 30 days immediately before or after the sale. If you do, IRS “wash sale” rules likely will prevent you from using the loss to offset your gains.
Capital gains generated by investments held in tax-advantaged retirement plans such as IRAs or 401(k)s do not face capital gains taxes. If the account is a traditional IRA or 401(k), the money eventually will be taxed as ordinary income when it’s withdrawn from the account…but if it’s a Roth account, those future withdrawals typically are not taxed. Similar: Capital gains generated by investments held in Health Savings Accounts (HSAs) and 529 Plans also generally do not result in capital gains taxes.
*Tax brackets cited in this article are those in effect for 2025. Many of these brackets increase annually to keep pace with inflation.
