In the United States, individuals and corporations pay a tax on the net total of all their capital gains. The tax rate depends on both the investor's tax bracket and the amount of time the investment was held. Short-term capital gains are taxed at the investor's ordinary income tax rate and are defined as investments held for a year or less before being sold. Long-term capital gains, on dispositions of assets held for more than one year, are taxed at a lower rate.See subsection (h) of .

Current law The United States taxes short-term capital gains at the same rate as it taxes ordinary income.

Long-term capital gains are taxed at lower rates shown in the table below. (Qualified dividends receive the same preference.)

Filing status and total long-term gains and qualified dividends – 2025 Taxrate Single Married filing jointly or qualified widow(er) Married filing separately Head of household Trusts and estates $0–$48,350 $0–$96,700 $0–$48,350 $0–$64,750 $0–$2,700(?) 0% $48,351–$533,400 $96,701–$600,050 $48,351–$300,000 $64,751–$566,700 $2,701–$13,250(?) 15% Over $533,400 Over $600,050 Over $300,000 Over $566,700 Over $13,250(?) 20%

However, taxpayers pay no tax on income covered by deductions: the standard deduction (for 2025, reflecting increases made by the One Big Beautiful Bill Act of 2025: $15,750 for an individual return, $23,625 for heads of households, and $31,500 for a joint return, increased for elderly and/or blind taxpayers), or more if the taxpayer has over that amount in itemized deductions. Amounts in excess of this are taxed at the rates in the above table.

Separately, the tax on collectibles and certain small business stock is capped at 28%. The tax on unrecaptured Section 1250 gain — the portion of gains on depreciable real estate (structures used for business purposes) that has been or could have been claimed as depreciation — is capped at 25%.

The income amounts ("tax brackets") were reset by the Tax Cuts and Jobs Act of 2017 for the 2018 tax year to equal the amount that would have been due under prior law. They are adjusted each year based on the Chained CPI measure of inflation.

Additional taxes There may be taxes in addition to the tax rates shown in the above table. Taxpayers earning income above certain thresholds ($200,000 for singles and heads of household, $250,000 for married couples filing jointly and qualifying widowers with dependent children, and $125,000 for married couples filing separately) pay an additional 3.8% tax, known as the net investment income tax (NIIT), on investment income above their threshold, with additional limitations. Therefore, the top federal tax rate on long-term capital gains is 23.8%. State and local taxes often apply to capital gains. In a state whose tax is stated as a percentage of the federal tax liability, the percentage is easy to calculate. Some states structure their taxes differently. In this case, the treatment of long-term and short-term gains does not necessarily correspond to the federal treatment.

Capital gains do not push ordinary income into a higher income bracket. The Capital Gains and Qualified Dividends Worksheet in the Form 1040 instructions specifies a calculation that treats both long-term capital gains and qualified dividends as though they were the last income received, then applies the preferential tax rate as shown in the above table. Conversely, however, this means an increase in ordinary income will withdraw the 0% and 15% brackets for capital gains taxes.

Cost basis The capital gain that is taxed is the excess of the sale price over the cost basis of the asset. The taxpayer reduces the sale price and increases the cost basis (reducing the capital gain on which tax is due) to reflect transaction costs such as brokerage fees, certain legal fees, and the transaction tax on sales.

Depreciation In contrast, when a business is entitled to a depreciation deduction on an asset used in the business (such as for each year's wear on a piece of machinery), it reduces the cost basis of that asset by that amount, potentially to zero. The reduction in basis occurs whether or not the business claims the depreciation.

If the business then sells the asset for a gain (that is, for more than its adjusted cost basis), this part of the gain is called depreciation recapture. When selling certain real estate, it may be treated as capital gain. When selling equipment, however, depreciation recapture is generally taxed as ordinary income, not capital gain. Further, when selling some kinds of assets, none of the gain qualifies as capital gain.

Other gains in the course of business If a business develops and sells properties, gains are taxed as business income rather than investment income. The Fifth Circuit Court of Appeals, in Byram v. United States (1983), set out criteria for making this decision and determining whether income qualifies for treatment as a capital gain.

Inherited property Under the stepped-up basis rule, for an individual who inherits a capital asset, the cost basis is "stepped up" to its fair market value of the property at the time of the inheritance. When eventually sold, the capital gain or loss is only the difference in value from this stepped-up basis. Increase in value that occurred before the inheritance (such as during the life of the decedent) is never taxed.

Capital losses If a taxpayer realizes both capital gains and capital losses in the same year, the losses offset (cancel out) the gains. The amount remaining after offsetting is the net gain or net loss used in the calculation of taxable gains.

For individuals, a net loss can be claimed as a tax deduction against ordinary income, up to $3,000 per year ($1,500 in the case of a married individual filing separately). Any remaining net loss can be carried over and applied against gains in future years. However, losses from the sale of personal property, including a residence, do not qualify for this treatment.See subsection (b) of .

Corporations with net losses of any size can re-file their tax forms for the previous three years and use the losses to offset gains reported in those years. This results in a refund of capital gains taxes paid previously. After the carryback, a corporation can carry any unused portion of the loss forward for five years to offset future gains.See subsection (a) of .

Return of capital Corporations may declare that a payment to shareholders is a return of capital rather than a dividend. Dividends are taxable in the year that they are paid, while returns of capital work by decreasing the cost basis by the amount of the payment, and thus increasing the shareholder's eventual capital gain. Although most qualified dividends receive the same favorable tax treatment as long-term capital gains, the shareholder can defer taxation of a return of capital indefinitely by declining to sell the stock.

History

From 1913 to 1921, capital gains were taxed at ordinary rates, initially up to a maximum rate of 7%. The Revenue Act of 1921 allowed a tax rate of 12.5% gain for assets held at least two years. From 1934 to 1941, taxpayers could exclude from taxation up to 70% of gains on assets held 1, 2, 5, and 10 years. Beginning in 1942, taxpayers could exclude 50% of capital gains on assets held at least six months or elect a 25% alternative tax rate if their ordinary tax rate exceeded 50%. From 1954 to 1967, the maximum capital gains tax rate was 25%. Capital gains tax rates were significantly increased in the 1969 and 1976 Tax Reform Acts. In 1978, Congress eliminated the minimum tax on excluded gains and increased the exclusion to 60%, reducing the maximum rate to 28%. The 1981 tax rate reductions further reduced capital gains rates to a maximum of 20%.

The Tax Reform Act of 1986 repealed the exclusion of long-term gains, raising the maximum rate to 28% (33% for taxpayers subject to phaseouts). The 1990 and 1993 budget acts increased ordinary tax rates but re-established a lower rate of 28% for long-term gains, though effective tax rates sometimes exceeded 28% because of other tax provisions. The Taxpayer Relief Act of 1997 reduced capital gains tax rates to 10% and 20% and created the exclusion for one's primary residence. The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced them further, to 8% and 18%, for assets held for five years or more. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the rates to 5% and 15%, and extended the preferential treatment to qualified dividends.

The 15% tax rate was extended through 2010 as a result of the Tax Increase Prevention and Reconciliation Act of 2005, then through 2012. The American Taxpayer Relief Act of 2012 made qualified dividends a permanent part of the tax code but added a 20% rate on income in the new, highest tax bracket.

The Emergency Economic Stabilization Act of 2008 caused the IRS to introduce Form 8949, and radically change Form 1099-B, so that brokers would report not just the amounts of sales proceeds but also the amounts of purchases to the IRS, enabling the IRS to verify reported capital gains.

The Small Business Jobs Act of 2010 exempted taxes on capital gains for angel and venture capital investors on small business stock investments if held for 5 years. It was a temporary measure but was extended through 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 as a jobs stimulus.

In 2013, provisions of the Patient Protection and Affordable Care Act ("Obama-care") took effect that imposed the Medicare tax of 3.8% (formerly a payroll tax) on capital gains of high-income taxpayers.

Summary of recent history From 1998 through 2017, tax law keyed the tax rate for long-term capital gains to the taxpayer's tax bracket for ordinary income, and set forth a lower rate for the capital gains. (Short-term capital gains have been taxed at the same rate as ordinary income for this entire period.) This approach was dropped by the Tax Cuts and Jobs Act of 2017, starting with tax year 2018.

July 1998 – 2000 2001 – May 2003 May 2003 – 2007 2008 – 2012 2013 – 2017 Ordinary income tax rate Long-term capital gainstax rate Ordinary income tax rate Long-term capital gainstax rate** Ordinary income tax rate Long-term capital gainstax rate Long-term capital gainstax rate Ordinary income tax rate Long-term capital gainstax rate 15% 10% 10% 10% 10% 5% 0% 10% 0% 15% 10% 15% 5% 0% 15% 0% 28% 20% 27%* 20% 25% 15% 15% 25% 15% 31% 20% 30%* 20% 28% 15% 15% 28% 15% 36% 20% 35%* 20% 33% 15% 15% 33% 15%*** 39.6% 20% 38.6%* 20% 35% 15% 15% 35% 15%*** 39.6% 20%*** * This rate was reduced one-half percentage point for 2001 and one-half percentage point for 2002 and beyond. ** There was a two percentage point reduction for capital gains from certain assets held for more than five years, resulting in 8% and 18% rates. *** The gain may also be subject to the 3.8% net investment income tax.

State capital gains taxes

Most states tax capital gains as ordinary income. States that do not tax income (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming) do not tax capital gains either. Washington state does not collect income taxes but has passed a capital gains tax as an excise (rather than income or property) tax.

Rationale

Who pays it Capital gains taxes are disproportionately paid by high-income households, as they are more likely to own assets that generate the taxable gains. While this supports the argument that payers of capital gains taxes have more "ability to pay", it also means that the payers are more able to defer or avoid the tax, because it only comes due if and when the owner sells the asset.