Capital gains tax is the tax on profit from selling an asset (stocks, bonds, real estate, cryptocurrency, etc.) for more than you paid for it. The gain is the difference between your selling price and your cost basis (purchase price plus certain adjustments). Capital gains are classified as either short-term or long-term based on how long you held the asset.
Short-term capital gains apply to assets held for one year or less and are taxed at your ordinary income tax rate (up to 37%). Long-term capital gains apply to assets held for more than one year and are taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income.
| Rate | Taxable Income |
|---|---|
| 0% | Up to $48,350 |
| 15% | $48,350 – $533,400 |
| 20% | Above $533,400 |
High-income taxpayers may also owe the 3.8% Net Investment Income Tax (NIIT) on investment income when modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly). State capital gains taxes add to the burden: California taxes capital gains as ordinary income (up to 13.3%), while most no-tax states exempt them entirely. Washington uniquely taxes long-term gains above $270,000 at 7%.
Strategies to minimize capital gains include tax-loss harvesting, holding assets for over one year, using tax-advantaged accounts (IRA, 401k), and timing sales in lower-income years.