Capital Gains Tax: What It Is, How It Works, and 2025 Rates

Overview

Capital gains tax is a tax on the profit you realize when you sell a capital asset for more than you paid. Common capital assets include stocks, bonds, cryptocurrencies, collectibles, and real estate. The amount you owe depends on how long you held the asset, your taxable income, and the type of asset sold.

Short-term vs. long-term

• Short-term capital gains: Assets held one year or less. Taxed as ordinary income at your regular federal income tax rates.
• Long-term capital gains: Assets held more than one year. Taxed at preferential long-term rates (generally lower than ordinary income rates).

2025 long-term capital gains rates (general)

• 0%, 15%, or 20% depending on taxable income.
• Gains on collectibles (art, antiques, coins, certain precious metals) are taxed at a maximum of 28%.
• Short-term gains are taxed at ordinary income rates.

Exceptions and special rules

Collectibles
* Net long-term gains on collectibles are capped at 28%; short-term gains are taxed as ordinary income.

Principal residence exclusion
* If you sell your primary residence and meet ownership/use rules (owned and lived in the home for at least two of the five years before sale), you can exclude up to:
* $250,000 for single filers
* $500,000 for married filing jointly
* Example: Buy for $200,000 and sell for $500,000 = $300,000 gain. A single seller can exclude $250,000 and report $50,000 taxable gain.
* Qualifying home improvements and documented costs can increase your cost basis and reduce taxable gain.

Investment real estate and depreciation recapture
* Depreciation claimed while the property was rented reduces cost basis and can increase taxable gain on sale.
* Depreciation recapture is generally taxed at up to 25%.
* Example: Building bought for $100,000, $5,000 depreciation claimed, sold for $110,000 → $15,000 total gain, $5,000 recapture taxed at 25% and $10,000 taxed at capital gains rates.

Net Investment Income Tax (NIIT)
* High-income taxpayers may owe an additional 3.8% NIIT on investment income (including capital gains) if modified adjusted gross income (MAGI) exceeds thresholds:
* $250,000 — married filing jointly or surviving spouse
* $200,000 — single or head of household
* $125,000 — married filing separately

How capital gains are calculated

1. Separate short-term and long-term gains and losses.
2. Net short-term gains against short-term losses to get a net short-term result.
3. Net long-term gains against long-term losses to get a net long-term result.
4. Offset net short-term against net long-term gains as required.
5. If losses exceed gains, you can deduct up to $3,000 of net capital losses against ordinary income each tax year; excess losses carry forward to future years.
6. Significant transactions and net gains are reported on Schedule D (Form 1040).

Strategies to reduce or defer capital gains tax

• Hold investments more than one year to qualify for long-term rates.
• Tax-loss harvesting: sell losing positions to offset gains; observe the wash sale rule (do not repurchase the same or substantially identical security within 30 days).
• Use tax-advantaged accounts (traditional 401(k), traditional IRA, Roth IRA):
• Trading within these accounts generally doesn’t trigger annual capital gains tax.
• Traditional accounts defer taxes until withdrawal (taxed as ordinary income).
• Roth qualified withdrawals are tax-free if the account meets the 5-year rule and other requirements.
• Time sales for lower-income years (e.g., after retirement) to take advantage of lower tax brackets.
• Track and document qualifying expenses and improvements to increase cost basis.
• Choose an appropriate cost-basis method when selling partial holdings: FIFO (default for many brokers), specific share identification, average cost (available for mutual funds), etc. Specific identification can help manage realized gains.
• Keep accurate records — purchase dates, costs, improvements, and brokerage statements are essential for correct reporting.

Practical tips

• Use tax software or a capital gains calculator for estimates.
• Confirm actual trade dates (settlement vs. trade date matters for holding period).
• Maintain records of receipts, confirmations, and improvement invoices.
• Consider consulting a tax advisor for large or complex transactions.

Key FAQs

When do you owe capital gains taxes?
* In the tax year you sell the asset and realize the gain. Estimated tax payments may be required if the gain creates a large tax liability.

Do I have to pay immediately when I sell?
* Taxes aren’t due the instant you sell, but they’re reported for the tax year of the sale. Quarterly estimated payments can be required to avoid penalties.

Are there capital gains exemptions on home sales?
* Yes — up to $250,000 for single filers and $500,000 for married filing jointly if you meet the ownership and use tests (2 of the last 5 years).

Conclusion

Capital gains tax depends primarily on holding period, income level, and asset type. Long-term rates (0%, 15%, 20%) are generally favorable compared with ordinary income rates, and several legal strategies—holding periods, tax-loss harvesting, retirement accounts, timing, and basis selection—can reduce or defer tax liability. Keep thorough records and consider professional advice for significant or complex situations.