When you sell an investment for more than you paid, the profit is a capital gain — and the IRS wants its share. How much you owe depends on how long you held the asset and your overall income level. Here is what you need to know for 2025.
Short-Term vs. Long-Term Capital Gains
The holding period determines your tax rate:
Short-term capital gains apply to assets held for one year or less. These gains are taxed as ordinary income at your regular federal tax rate — up to 37% in 2025.
Long-term capital gains apply to assets held for more than one year. These benefit from preferential rates of 0%, 15%, or 20%.
The difference can be dramatic. A high-income single filer might pay 37% on a short-term gain but only 20% on a long-term gain from the same investment — nearly cutting the tax in half.
2025 Long-Term Capital Gains Brackets
Single Filers
| Tax Rate | Taxable Income |
|---|---|
| 0% | Up to $48,350 |
| 15% | $48,351 – $533,400 |
| 20% | Over $533,400 |
Married Filing Jointly
| Tax Rate | Taxable Income |
|---|---|
| 0% | Up to $96,700 |
| 15% | $96,701 – $600,050 |
| 20% | Over $600,050 |
Note that these thresholds are based on your total taxable income, not just your capital gains. Your ordinary income fills up the brackets first, and then your capital gains are stacked on top.
The Net Investment Income Tax (NIIT)
High-income investors face an additional 3.8% Net Investment Income Tax on the lesser of their net investment income or the amount their modified AGI exceeds:
- $200,000 for single filers
- $250,000 for married filing jointly
This means the maximum federal rate on long-term capital gains can reach 23.8% (20% + 3.8% NIIT). State taxes can push the total even higher.
Tax-Loss Harvesting
One of the most effective strategies for managing capital gains tax is tax-loss harvesting: selling investments that are at a loss to offset gains from other investments.
Here is how it works:
- You sell an investment at a loss.
- The loss offsets an equal amount of capital gains.
- If your losses exceed your gains, you can deduct up to $3,000 of net losses against ordinary income per year.
- Any remaining losses carry forward to future tax years indefinitely.
Watch out for the wash-sale rule: If you repurchase a “substantially identical” security within 30 days before or after the sale, the IRS disallows the loss deduction.
Practical Example
Suppose you are a single filer with $80,000 in salary and you sell stock for a $20,000 long-term gain. Your total taxable income is $100,000. After the standard deduction of $15,000, your taxable income is $85,000.
Your salary fills the 0% capital gains bracket first. The $20,000 gain is then taxed at 15%, resulting in a federal capital gains tax of $3,000.
If you also had a $5,000 loss from another investment, you could offset the gain, reducing the taxable gain to $15,000 and the tax to $2,250 — saving you $750.
Strategies to Minimize Capital Gains Tax
- Hold investments for more than one year to qualify for long-term rates.
- Harvest losses to offset gains each year.
- Use tax-advantaged accounts (IRA, 401k) where gains are not taxed annually.
- Consider the 0% bracket — retirees and low-income years may qualify for tax-free long-term gains.
- Gift appreciated assets to charity to avoid capital gains entirely while receiving a deduction.
Bottom Line
The difference between short-term and long-term treatment can save you thousands. Whenever possible, plan your sales around the one-year holding period, use tax-loss harvesting to offset gains, and be mindful of the NIIT threshold if you are a high-income investor.