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Capital gains tax basics (US)

When you sell an investment for more than you paid, the profit may be taxed. How long you held it changes the rate. Here are the US federal basics, using the IRS's figures for tax year 2025.

A calculator, reading glasses and a diary page noting a tax deadline
Photo: “Tax return deadline day 2018, amid tax return forms, glasses and a calculator” by DPP Business and Tax, CC BY 2.0, via source (edited: cropped/recolored).

Quick answer

In the US, profit from selling an asset like a stock is a capital gain. Held one year or less, it is short-term and taxed at ordinary income rates; held more than one year, it is long-term and usually taxed at 0%, 15% or 20% [1].

Key points

  • A capital gain is the sale price minus your basis, which is usually what you paid.
  • Held more than one year = long-term; one year or less = short-term (US federal rules).
  • Short-term gains are taxed as ordinary income; long-term gains usually at 0%, 15% or 20% depending on taxable income.
  • Net capital losses can reduce other income by up to $3,000 a year ($1,500 married filing separately), with the rest carried forward.
  • A wash sale — buying substantially identical securities within 30 days before or after a loss sale — disallows the loss for now.

#What is a capital gain?

Investor.gov, the SEC's education site, defines a capital gain as "The profit that comes when an investment is sold for more than the price the investor paid for it" [2]. The IRS calls almost everything you own for personal or investment use a capital asset, including stocks and bonds, and computes the gain or loss as the difference between your adjusted basis and the amount you realized from the sale [1]. Basis is generally what the asset cost you. If you sell for less than your basis, you have a capital loss. See the glossary entry for capital gain.

One detail surprises beginners: "Losses from the sale of personal-use property, such as your home or car, aren't tax deductible" [1]. Investment losses are treated differently, as covered below.

#What is the difference between short-term and long-term gains?

It comes down to how long you held the asset. The IRS says: "Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term" [1]. The difference matters because "Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates," while most long-term gains get lower rates [1].

Holding period, US federal rules

  1. Day you buy

    The holding period starts.[1]

  2. One year or less

    A sale produces a short-term gain or loss, taxed with ordinary income.[1]

  3. More than one year

    A sale produces a long-term gain or loss, eligible for the 0%, 15% or 20% rates.[1]

#What are the long-term capital gains rates for 2025?

For tax year 2025, IRS Topic 409 lists these thresholds based on taxable income (income after deductions). The 0% rate applies up to the first threshold, 15% applies above it up to the second, and 20% applies to the extent taxable income exceeds the 15% thresholds [1]. Some gains have different maximum rates, such as 28% for collectibles and 25% for unrecaptured section 1250 gain on certain real estate [1].

US long-term capital gains rates by taxable income, tax year 2025 (IRS Topic 409) [1]
Filing status0% rate15% rate20% rate
Single$0 up to $48,350Over $48,350 up to $533,400Over $533,400
Married filing jointly / qualifying surviving spouse$0 up to $96,700Over $96,700 up to $600,050Over $600,050
Head of household$0 up to $64,750Over $64,750 up to $566,700Over $566,700
Married filing separately$0 up to $48,350Over $48,350 up to $300,000Over $300,000

Short-term gains instead use the ordinary income brackets. For tax year 2025, the IRS lists seven rates for single filers, from 10% up to 37%; for example, 22% applies to taxable income from $48,476 to $103,350 [3].

#How much difference does the holding period make?

Worked example

Worked example: same gain, different holding periods

A single filer buys 100 shares at $50 ($5,000) and sells them at $65 ($6,500). Their 2025 taxable income, including the gain, is about $80,000, so the gain sits in the 22% ordinary bracket and in the 15% long-term band.

Gain ($6,500 − $5,000)
$1,500
Held 10 months: short-term, taxed at 22% ($1,500 × 22%)
$330 federal tax
Held 13 months: long-term, taxed at 15% ($1,500 × 15%)
$225 federal tax
Difference
$105

Holding past the one-year mark lowered the federal tax on this gain by $105 — but only if the price was still there after 13 months. Prices can fall while you wait.

Calculated in Python using IRS 2025 figures. Simplified: ignores state tax, other federal taxes and any other gains or losses.

Federal tax on a $1,500 gain (hypothetical single filer, 2025)

Short-term (22% bracket)$330Long-term (15% rate)$225Short-term (22% bracket)$330Long-term (15% rate)$225
Same profit, same person. Only the holding period changed.

#What happens if you have capital losses?

Losses first offset gains. If losses are larger than gains for the year, the IRS lets you use the excess to lower other income by "the lesser of $3,000 ($1,500 if married filing separately) or your total net loss," and any loss above that limit can be carried forward to later years [1].

Hypothetical $10,000 net capital loss, single filer, no other gains in later years
YearDeducted against other incomeCarried forward
1$3,000$7,000
2$3,000$4,000
3$3,000$1,000
4$1,000$0

#What is a wash sale?

IRS Publication 550 (for 2025 returns) says a wash sale occurs when you sell or trade stock or securities at a loss and, within 30 days before or after the sale, you buy substantially identical stock or securities [4]. Substantially identical includes the same stock, as well as certain contracts and options on it. When a wash sale happens, the loss is not allowed for now; it is added to the basis of the new shares, and the holding period of the old shares carries over to the new ones [4]. In effect, the loss is postponed, not erased.

Worked example

Worked example: a wash sale

You buy 100 shares at $50 ($5,000). The price drops and you sell at $40 ($4,000). Twelve days later you buy 100 shares of the same stock at $42 ($4,200).

Loss on the sale ($5,000 − $4,000)
$1,000 — disallowed for now
Basis of new shares ($4,200 + $1,000)
$5,200 ($52 a share)
Later sale at $55 ($5,500 − $5,200)
$300 gain
Without the basis adjustment the gain would be
$1,300

The $1,000 loss shows up later as a smaller gain ($300 instead of $1,300). Overall you are taxed on the same net $300 — just at a different time.

Calculated in Python. Simplified illustration of the basis rule in IRS Publication 550.

Common beginner mistakes

  1. Selling one day too early

    Long-term means held more than one year. A sale exactly one year after purchase is still short-term under the IRS wording.

  2. Letting the tax tail wag the dog

    Waiting for long-term treatment saves tax only if the price holds. A falling price can cost more than the tax saved.

  3. Using last year's thresholds

    The 0% and 15% income thresholds are updated for each tax year. The figures here are for 2025; check IRS Topic 409 for the year you file.

  4. Buying back too soon after a loss sale

    Repurchasing the same security within 30 days before or after the sale triggers a wash sale and postpones the loss.

What's the bottom line?

US capital gains tax turns on three questions: how much you gained over your basis, how long you held the asset, and your taxable income for the year. Holding more than one year usually means a lower rate, losses can offset gains and up to $3,000 of other income, and buying back too quickly after a loss sale postpones the loss. Figures change every tax year, so confirm them on the IRS site before you file. To see how dividends and fund distributions fit in, read how dividends work and your first steps as a new investor.

Frequently asked questions

Do I pay capital gains tax if I do not sell?

Generally no. A capital gain or loss arises when you sell or otherwise dispose of the asset. Rising prices on shares you still hold are unrealized gains.

Is the long-term rate always lower than the short-term rate?

For most people, yes, but not always. At low taxable income, long-term gains can be taxed at 0% and ordinary income at 10% or 12%; the gap depends on your bracket.

Can a capital loss reduce my salary income?

Partly. After offsetting gains, up to $3,000 of net capital loss a year ($1,500 if married filing separately) can reduce other income, and the rest carries forward.

Do these rules apply outside the US?

No. This page describes US federal rules for tax year 2025. Other countries tax investment gains differently, and US states may add their own tax.

Sources

Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.

  1. Internal Revenue Service. Topic no. 409, Capital gains and losses (2026). Accessed 2026-10-03.A
  2. U.S. SEC — Investor.gov. Capital Gain (glossary) (2026). Accessed 2026-10-03.A
  3. Internal Revenue Service. Federal income tax rates and brackets (2026). Accessed 2026-10-03.A
  4. Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses (2025). Accessed 2026-10-03.A

This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.