Capital Gains Tax Rates 2024-2025: Short-Term vs. Long-Term

Long-Term Capital Gains: 0%, 15%, 20% Federal Brackets

Assets held longer than one year qualify for preferential long-term capital gains rates. For 2024, the three brackets are: 0% rate applies to taxable income up to $47,025 (single) / $94,050 (MFJ). 15% rate applies from $47,026 to $518,900 (single) / $94,051 to $583,750 (MFJ). 20% rate applies above those thresholds.

For 2025, brackets are slightly higher due to inflation indexing: 0% up to $48,350 (single) / $96,700 (MFJ); 15% from $48,351 to $533,400 (single) / $96,701 to $600,050 (MFJ); 20% above.

The 0% bracket is often overlooked. A retired couple with $80,000 of total income, $50,000 from long-term capital gains, pays 0% federal tax on those gains. This is a powerful planning opportunity for early retirees and those between jobs.

Important: the bracket thresholds refer to taxable income, which includes the capital gain itself. So if you have $40,000 of ordinary income and want to realize long-term gains in the 0% bracket, you have approximately $7,025 of room before hitting the 15% bracket (in 2024, single). Always verify current brackets with the IRS.

Short-Term Capital Gains: Ordinary Income Rates

Assets held one year or less generate short-term capital gains, taxed as ordinary income at your marginal federal rate (10%, 12%, 22%, 24%, 32%, 35%, or 37%). There is no preferential rate for short-term gains.

For active traders and those who frequently rebalance, short-term treatment can dramatically increase tax cost. A high earner realizing a $100,000 short-term gain pays up to 37% federal ($37,000) plus state tax. The same gain, held one year and a day, would be taxed at 20% federal ($20,000), a $17,000 difference.

Practical tip: when selling appreciated assets, count the holding period carefully. The one-year mark is the day AFTER the trade date of purchase. If you buy on January 15, 2024, you must sell on January 16, 2025 or later for long-term treatment.

Net Investment Income Tax (NIIT): The 3.8% Surtax

High-income taxpayers pay an additional 3.8% Net Investment Income Tax on the lesser of (a) net investment income or (b) the excess of MAGI over $200,000 (single) / $250,000 (MFJ). This surtax was enacted as part of the Affordable Care Act and applies on top of regular capital gains rates.

Effective top federal capital gains rate for high earners: 20% + 3.8% = 23.8%. Add a high-tax state like California (13.3%) and the combined top rate reaches approximately 37.1%, close to the top ordinary income rate, eroding much of the long-term preference.

Investment income subject to NIIT includes: capital gains, dividends, interest, rents, royalties, annuities, and passive business income. Wages and active business income are NOT subject to NIIT (they are subject to the 0.9% Additional Medicare Tax instead).

Planning opportunity: if you are near the $200K/$250K threshold, consider realizing gains in years when your income is lower (between jobs, before retirement, sabbatical). Bunching gains into alternating years can keep you below the threshold. Always consult a qualified tax professional before executing tax strategies.

State Capital Gains Tax

Most states tax capital gains as ordinary income at the state's income tax rate. California's top rate of 13.3% applies to capital gains, making the combined federal + state rate as high as 37.1% for top earners. New York (10.9% top), New Jersey (10.75%), and Hawaii (11%) similarly tax capital gains as ordinary income.

Nine states have no individual income tax and therefore no state capital gains tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington (with caveats), and Wyoming. Washington State imposes a 7% tax on long-term capital gains above ~$270,000.

Some states offer partial exclusions or lower rates for long-term capital gains: Arkansas (excludes 50% of long-term gains), North Dakota (lower rate), Wisconsin (60% exclusion on certain assets held 5+ years), Montana (varies).

For high-net-worth investors, relocating to a no-tax state before realizing large gains can save hundreds of thousands of dollars. The 183-day residency rule applies, establish domicile in the new state BEFORE the sale, not after. Always consult a qualified tax professional before relocating for tax purposes.

Tax-Loss Harvesting: Offsetting Gains with Losses

Capital losses offset capital gains dollar-for-dollar. If you have $50,000 of long-term gains and $20,000 of long-term losses, you pay tax on $30,000 of net gain. Short-term losses offset short-term gains first; net short-term loss then offsets long-term gain (and vice versa).

If total losses exceed total gains in a year, up to $3,000 of net capital loss can offset ordinary income (wages, interest, etc.). Unused losses carry forward indefinitely to future years. Many investors intentionally 'harvest' losses in December to offset gains, then immediately repurchase a similar (but not 'substantially identical') security to maintain market exposure.

Wash sale rule: if you sell a security at a loss and buy a 'substantially identical' security within 30 days before or after the sale, the loss is disallowed and added to the basis of the new position. The rule applies across all your accounts (including spouse's), not just the account where the loss was realized.

To avoid wash sales while maintaining exposure: (a) wait 31 days before repurchasing, (b) buy a similar but not identical ETF (e.g., VTI instead of ITOT, or VOO instead of SPY), (c) buy an ETF in a related but not identical segment (e.g., large-cap value instead of large-cap blend), or (d) double up on the position 31+ days before selling, then sell the older shares.

Tax-loss harvesting is most valuable in taxable brokerage accounts. Losses in tax-advantaged accounts (401k, IRA) provide no tax benefit and are permanently lost. Always consult a qualified tax professional before executing complex tax strategies.

Special Capital Gains Situations

Section 1202 Qualified Small Business Stock (QSBS): Gains on the sale of qualified small business stock held more than 5 years may be excluded from federal tax. The exclusion is the greater of $10 million or 10x the taxpayer's basis in the stock. This is a powerful planning tool for founders and early employees.

Section 1031 Like-Kind Exchange: Real estate investors can defer capital gains tax by exchanging investment property for other investment property. The Tax Cuts and Jobs Act limited 1031 to real property (not personal property or intangibles) effective 2018. Strict 45-day identification and 180-day closing rules apply.

Opportunity Zones: Investing capital gains in Qualified Opportunity Funds defers tax until December 31, 2026, eliminates tax on the deferred gain if held 7+ years (this benefit was reduced by TCJA changes), and eliminates tax on the Opportunity Zone investment's own appreciation if held 10+ years.

Primary Residence Exclusion (Section 121): Up to $250,000 (single) / $500,000 (MFJ) of gain on the sale of a primary residence is excluded from tax, if you owned and used the home as your primary residence for 2 of the past 5 years. This is one of the most valuable tax breaks available to middle-class homeowners. Always verify current rules with the IRS.