Long-term capital gains are derived from investments that are held for more than one year and that are taxed according to graduated thresholds for taxable income at 0%, 15%, or 20%. A short-term capital gain results from an asset owned for a year or less, which is taxed as though it were ordinary income.

The tax on a long-term capital gain is almost always lower than if the same asset were sold (and the gain realized) in less than a year. As income, short-term gains are hit with one of seven tax rates that correspond to the tax brackets. Five of those rates exceed the highest possible rate you'll pay on a long-term capital gain. And only taxpayers with a taxable income of more than $434,550 (single, or married and filing jointly) are subject to that highest long-term rate.

Gains are calculated on your basis in an asset—what you paid to acquire it, less depreciation, plus costs of sale and costs of any improvements you made. You inherit the donor's basis when an asset is given to you as a gift.

Capital gains policy encourages you to hold assets for a year or more. These taxable assets include stocks, bonds, precious metals, and real estate.

Key Takeaways

  • Short-term gains are taxed as regular income according to tax brackets up to 37%, as of 2020.
  • Long-term gains are subject to more-favorable rates of 0%, 15%, and 20%, also based on income.
  • Short-term gains result from selling property owned for one year or less.

Long-Term Capital Gains Rates

The tax treatment of long-term capital gains changed in recent years. Prior to 2018, long-term capital gains rates aligned closely with income-tax brackets. Now, the Tax Cuts and Jobs Act has created unique brackets for long-term capital-gains tax. These numbers generally change from year to year.

Tax Rates for Long-Term Capital Gains 2019 (2020)
 

Filing Status

 

0% rate

 

15% rate

 

20% rate

 

Single

 

Up to $39,375 ($40,000)

$39,376 to $434,55 ($40,000 to to $441,450)

Over $434,550 ($441,450)

 

Head of household

Up to $52,750 ($53,600)

 

$52,751 to $461,700 ($53,600 to $469,050)

Over $461,700 ($469,050)

 

Married filing jointly 

Up to $78,750 ($80,000)

$78,751 to $488,850 ($80,000 to $496,600)

Over $488,850 ($496,600)

 

Married filing separately

 

Up to $39,375 ($40,000)

$39,376 to $244,425 ($40,000 to $248,300)

Over $244,425 ($248,300)

Short-Term Capital Gains Tax Rates

Short-term capital gains are taxed as though they are ordinary income. Any income you receive from investments you held for less than a year must be included in your taxable income for that year. So if you have, say, $80,000 in taxable income from salary and $5,000 from short-term investments, your total taxable income is $85,000.

Here's the tax you'll pay on short-term capital gains. They are your tax brackets for ordinary income:

Tax Rates for Short-Term Capital Gains 2019 (2020)
Filing Status 10% 12% 22% 24% 32% 35% 37%
Single Up to $9,700 ($9,875) $9,701 to $39,475
($9,876 to $40,125)
$39,476 to $84,200
($40,126 to $85,525)
$84,201 to $160,725
($85,526 to $163,300)
$160,726 to $204,100
($163,301 to $207,350)
$240,101 to $510,300
($207,351 to $518,400)
Over $510,300
($518,400)
Head of household Up to $13,850 ($14,100) $13,851 to $52,850
($14,101 to $53,700)
$52,851 to $84,200
($53,701 to $85,500)
$84,201 to $160,700
($85,501 to $163,300)
$160,701 to $204,100
($163,301 to $207,350)
$204,101 to $510,300
($207,351 to $518,400)
Over $510,300 ($518,400)
Married filing jointly Up to $19,400
($19,750)
$19,401 to $78,950
($19,751 to $80,250)
$78,951 to $168,400
($80,251 to $171.050)
$168,401 to $321,450
($171, 051 to $326,600)
$321,451 to $408,200
($326,601 to $414,700)
$408,201 to $612,350
($414,701 to $622,050)
Over $612,350
($622,050)
Married filing separately Up to $9,700 ($9,875) $9,701 to $39,475
($9,876 to $40,125)
$39,476 to $84,200 ($40,126 to $85,525) $84,201 to $160,725
($35,526 to $163,300)
$160,726 to  $204,100
($163,301 to ($207,350)
$204,101 to $306,750
($207,351 to $311,025)
Over $306,750
($311,025)

Ordinary income. is taxed at differing rates depending on your income. It's possible that a short-term capital gain—or part of it at least—might be taxed at a higher rate than your regular earnings. That's because it might cause part of your overall income to jump into a higher tax bracket.

Let's use the case above as an example, using the 2019 tax rates taxpayers will employ to file in April 2020. Assuming you filed that income using the single status, you'd be in the 22% tax bracket with your regular earnings. (Actually, the progressive nature of the federal tax system means the first $9,700 you earn would be taxed at 10%, your income from $9,701 up to $39,475 would taxed at 12%, and only the income from $39,475 to $80,000 would be taxed at 22%.) Part of your $5,000 capital gain—the portion up to the $82,199 limit for the bracket—would be taxed at 22%. The remaining $2,801 of the gain, however, would be taxed at 24%, the rate for the next-highest tax bracket.

Capital Gains Special Rates and Exceptions

Some assets receive different capital-gains treatment or have different time frames than the rates indicated above.

Collectibles

You're taxed at a 28% rate—regardless of your income—for gains on art, antiques, jewelry, precious metals, stamp collections, and other collectibles.

Owner-occupied real estate

There's a special capital gains arrangement if you sell your principal residence. The first $250,000 of an individual's capital gains on the sale of a home is excluded from taxable income ($500,000 for those married filing jointly) as long as the seller has owned and lived in the home for two years or more. You don't get a break if you sell the home for less than you paid for it; capital losses from the sale of personal property, such as a home, are not deductible from gains.

Here's how it can work. A single taxpayer who purchased a house for $300,000 and later sells it for $700,000 made a $400,000 profit on the sale. After applying the $250,000 exemption, they must report a capital gain of $150,000, which is the amount subject to the capital gains tax.

In most cases, significant repairs and improvements can be added to the base cost of the house. These can serve to further reduce the amount of taxable capital gain. So $50,000 spent on a new kitchen could be added to the $300,000 original purchase price. That would raise the total base cost for capital gains calculations to $350,000 and lower the taxable capital gain from $150,000 to $100,000.

Investment real estate

Investors who own real estate are often allowed to take depreciation deductions against income to reflect the steady deterioration of the property as it ages. (Don't confuse this decline in the home's condition with a possible appreciation in the value of the entire property driven by the real-estate market. They're separate figures.)

The deduction for depreciation essentially reduces the amount you're considered to have paid for the property in the first place. That in turn can increase your taxable capital gain when the property is sold.

For example, if you paid $200,000 for a building and you're allowed to claim $5,000 in depreciation, you'll be treated subsequently as if you'd paid $195,000 for the building. If you then sell the real estate, the $5,000 is treated as recapturing those depreciation deductions. The tax rate that applies to the recaptured amount is 25%. So if you sold the building for $210,000, there would be total capital gains of $15,000. But $5,000 of that figure would be treated as a recapture of the deduction from income. That recaptured amount is taxed at 25%, where the remaining $10,000 of capital gain would be taxed at one of the 0%, 15%, or 20% rates indicated above.

Consider speaking with a tax professional about the 1031 exchange process if you own real estate as an investment and are contemplating a sale. A successful 1031 exchange may allow you to sell property and reinvest the proceeds into new real estate without paying capital gains or depreciation recapture taxes.

Investment Exceptions

High-income earners may be subject to another levy, the net investment income tax. This tax imposes an additional 3.8% on your investment income, including your capital gains if your modified adjusted gross income (not your taxable income) exceeds certain maximums: $250,000 if married and filing jointly or you're a surviving spouse, $200,000 if you're single or a head of household, and $125,000 if married filing separately.

People with high adjusted gross income may be subject to an additional 3.8% tax on gains from their investments.

The Advantages of Long-Term Over Short-Term Gains

It can be advantageous to keep investments for longer if they will be subject to capital gains once they're realized. There are two reasons for this.

First, the tax bite will be lower for many or most people if they realize a capital gain in more than a year. Let's say you bought 100 shares of XYZ stock at $20 per share and sold them at $50 per share. Your regular income from earnings is $100,000 a year and you are part of a married couple that files jointly. The chart below compares the taxes you'd pay if you held and sold the stock in more than a year and less than a year.

How Patience Can Pay Off in Lower Taxes
Transactions and consequences Long-term capital gain Short-term capital gain
Bought 100 shares @ $20 $2,000 $2,000
Sold 100 shares @ $50 $5,000 $5,000
Capital gain $3,000 $3,000
Capital gain  $450 (taxed @ 15%) $720 (taxed @24%)
Profit after tax $2,550 $2,280

This chart shows how a married couple earning $100,000 a year could avoid almost $300 in tax by waiting at least a year before selling shares that had appreciated $3,000.

You'd forego $450 of your profits by opting for a long investment gain and being taxed at long-term capital gains rates. But had you held the stock for less than one year (and so incurred a short-term capital gain), your profit would have been taxed at your ordinary income tax rate. For our $100,000 a year couple, that would trigger a tax bite of 24%, the applicable rate for income over $84,200. That adds an additional $270 to the capital-gains tax bill, for a total of $720.

You might make a higher return by cashing in your investments frequently and repeatedly shifting the funds to fresh new opportunities. But that higher return may not compensate for higher short-term capital gains tax bills. To illustrate, we calculated the 30-year impacts of investing $1,000 for a high-rolling couple who'd pay the highest long-term capital gains rate of 20%. The calculations compared investing long-term versus in a series of short-term investments.

The long-run strategy would yield almost an additional $20,000 over 30 years compared with the "realize-and-reinvest" approach. That holds true despite the long-term investment earning 10% a year versus 12% for each of the short-term investments.

Making constant changes in investment holdings, resulting in high payments of capital gains tax and commissions, is called churning. Portfolio managers and brokers have been accused of inflating their commissions with such practices.

The Bottom Line

The tax on a long-term capital gain is almost always lower than if the same asset were sold in less than a year; most taxpayers don't have to pay the highest long-term rate. Tax policy encourages you to hold assets subject to capital gains for a year or more.