What is the capital gains tax rate?

Key points

• Short-term and long-term capital gains are taxed differently.
• The key difference between a short- and a long-term capital gain is how long you hold an asset.
• Capital gains taxes are not avoidable, but there are strategies to reduce your tax burden.

Are you an investor who’s seen impressive returns on your investments? Before you start counting your profits, it’s important to understand the impact of capital gains taxes. 

These taxes can significantly affect your investment returns, and the rules and regulations can be complex and confusing. 

But don’t worry. We did all the research for you. Below, we’ll break down the basics of capital gains taxes, including how they work, the rates and some exceptions. Whether you’re a seasoned investor or just starting out, understanding capital gains taxes is crucial for maximizing your returns. 

What is capital gains tax? And how does capital gains tax work?

You earn a capital gain when you sell an asset or investment for more than you paid for it. And you best believe that the government will come looking for its portion of the profit. 

“Capital gains is the tax you pay on the profit when you sell an investment — stocks, bonds, digital assets, jewelry, coin collections and real estate — and is owed for the tax year when it is sold,” says Carl Holubowich, a certified financial planner at Armstrong Fleming & Moore, Inc.

The amount you owe in taxes will depend on your income level and how long you held on to the asset. 

Short-term vs. long-term capital gains tax

The key difference between short-term and long-term capital gains tax lies in the holding period of the asset.

Short-term capital gains tax applies to assets held for a year or less, while long-term capital gains tax applies to assets held for more than a year.

“Short-term capital gains tax rates are the same as your ordinary income tax rates, while long-term capital gains tax rates are lower than ordinary income tax rates,” says Sean August, CEO of The August Wealth Management Group. “The exact rates depend on your tax bracket and other factors.”

Generally, long-term capital gains tax rates range from zero to 20%, while short-term capital gains tax rates range from 10% to 37%.

How to calculate your long-term capital gains

Long-term capital gains are taxed at lower rates than their short-term counterparts and range from zero to 20%. The amount of long-term capital gains taxes that you’ll pay depends on your income level.

Calculating your long-term capital gains tax obligations is fairly easy.

Example: Suppose you purchase a stock with an initial investment of $2,000. After five years, your stock purchase is worth $6,000. Based on your income, you fall in the 22% capital gains tax bracket. You can determine your tax burden with this simple formula: 

• $6,000 (current stock value) – $2,000 (initial purchase value) = $4,000 profit.
• $4,000 x 22% (0.22) = $880 in capital gains taxes owed.
• $4,000 (profit) – $600 (taxes) = $3,120 net profit.

2023 capital gains tax rates

Capital gains tax rates vary depending on how long you held the asset you are selling and your income level. Remember, assets held for one year or less are short-term, and assets held for more than one year are long-term. The current tax rates are displayed below.

SHORT-TERM CAPITAL GAINS TAX RATES (2023)
Tax rate	Single filer income range	Married joint filers income range	Head of household income range
10%	$0 – $11,000	$0 – $22,000	$0 – $15,700
12%	$11,001 – $44,725	$22,001 – $89,450	$15,701 – $59,850
22%	$44,726 – $95,375	$89,451 – $190,750	$59,851 – $95,350
24%	$95,376 – $182,100	$190,751 – $364,200	$95,351 – $182,100
32%	$182,101 – $231,250	$364,201 – $462,500	$182,101 – $231,250
35%	$231,251 – $578,125	$462,501 – $693,750	$231,251 – $578,100
37%	$578,126 or more	$693,751 or more	$578,101 or more

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LONG-TERM CAPITAL GAINS TAX RATES (2023)
Tax rate	Single filer income range	Married joint filers income range	Head of household income range
0%	$0 – $44,625	$0 – $89,250	$0 – $59,750
15%	$44,626 – $492,300	$89,251 – $553,850	$59,751 – $523,050
20%	$492,301 or more	$553,851 or more	$523,751 or more

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Capital gains tax tips

Here are a few tips to help offset or reduce your tax obligations for any profits made through investments. 

“The most obvious way to avoid capital gains is to not sell an investment since you only pay taxes when you actually sell,” says Daniel Milan, managing partner at Cornerstone Financial Services. 

But not everyone wants to hold on to investments that have gained value. Another way to mitigate taxes is to do what is called tax-loss harvesting at the end of every year, Milan explains. 

Tax-loss harvesting is where an investor may sell investments that have lost value over time, as well as investments that have gained value, and those losses versus gains can offset each other.

Example: Suppose you have an investment that lost $2,000 and another that gained $5,000. Through tax-loss harvesting, you can use your losses to offset your gains. In this example, your $2,000 loss will be subtracted from your $5,000 gain, reducing your tax bill and leaving $3,000 you are responsible for paying taxes on. 

Capital gains exceptions and special rates

According to the IRS, there are some situations where long-term capital gains will be taxed at rates greater than the 20% maximum: 

1. The taxable part of a gain from selling a qualified small-business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles, such as coins or art, are taxed at a maximum 28% rate.
3. The portion of any unrecaptured gain from selling real property is taxed at a maximum 25% rate.

Frequently asked questions (FAQs)