What is the long-term capital gains tax?

One of the biggest motivations to invest is to make a profit. But if you sell an investment for more than you bought it for, Uncle Sam will want his cut. That's where capital gains tax comes in. How much you pay in tax on these gains depends on your income, basis, and holding period. Here's how to tell whether your asset will be charged long-term capital gains tax—and what percentage you might owe.

What is the long-term capital gains tax?

The federal long-term capital gains tax rate is anywhere from 0% to 20%, depending on your income. This is the tax you may have to pay on profits for selling investments you held for more than a year. The long-term capital gains tax rate could be as low as 0% for lower-income investors. Even higher income earners typically pay a lower rate than their ordinary income tax rate. The federal long-term gains rate is generally no more than 20%, while ordinary income tax rates can go as high as 37%. Depending on where you live, you may also need to pay state and/or local income taxes on realized capital gains.

And depending on your income, you may be subject to the net investment income tax (NIIT). It applies to people with modified adjusted gross income (MAGI) above $200,000 for single filers and $250,000 for couples filing jointly. The tax of 3.8% is on top of capital gains taxes. So for people paying long-term capital gain rates, they can be as high as 23.8%, not including state and local taxes, which can push your tax rate even higher. The following chart shows long-term capital gains tax rates by filing status and income.

Long-term capital gains tax rates 2025

Source: Internal Revenue Service

Long-term capital gains tax rates 2026

Source: Internal Revenue Service

What are long-term capital gains?

Long-term capital gains are the profits from selling an asset you've held for more than 1 year. If you lose money from the sale, it's known as a long-term capital loss and you don't pay taxes on your loss. If you sell an asset you've held for a year or less, you will have made either a short-term capital gain (if the investment rose in value) or short-term capital loss (if it fell).

How does the long-term capital gains tax work?

Generally, you'll pay long-term capital gains taxes for any investments you held over a year in a taxable account. You'll need to report these gains when you file tax returns for the calendar year in which you sold the asset. The capital gains tax rate you'll pay depends on:

• Your overall income
• How much you originally paid for an investment, plus adjustments (such as broker's fees, commissions, and return of capital)
• When you bought the investment

Your original price sets the "cost basis," or the benchmark used for determining how much profit or loss resulted from the sale.

Meanwhile, when you bought the investment determines whether you have long-term or short-term capital gains, and consequently, if you're taxed at the short- or long-term capital gains tax rate. High earners may be subject to an additional 3.8% NIIT on both short- and long-term capital gains.

Note that capital gains taxes don't apply to tax-advantaged accounts, like 401(k)s and other employer-sponsored retirement plans, individual retirement accounts (IRAs), 529s, or health savings accounts (HSAs). You may still owe ordinary income taxes on withdrawals for certain accounts or if requirements for tax-deferred or tax-free^1,2 withdrawals aren't met.

Also be aware you may have to pay capital gains tax on shares you own in a mutual fund or exchange-traded fund (ETF) if the fund has sold securities for a profit, even if you didn't sell your shares. At the end of each year, you'll receive a form listing the amount of capital gains your shares earned, and then you can report the amount of these so-called "capital gains distributions" you are responsible for.

Long-term capital gains tax vs. short-term capital gains tax

The difference in when you pay long-term vs. short-term capital gains tax is the length of time you held the investment before selling it. Investments held for over a year are considered long-term, with a maximum 20% tax rate on the gains. Those held for 1 year or less are considered short-term, with federal tax rates ranging from 10% to 37%. You may also need to pay state and/or local income taxes on realized capital gains, depending on where you live.

Short-term capital gains tax rates 2025

Short-term capital gains tax rates for 2025 are equal to your current federal ordinary income tax rate.

Short-term capital gains tax rates 2026

Short-term capital gains tax rates for 2026 are equal to your 2026 federal income tax rate.

Source: Internal Revenue Service

Ways to help reduce long-term capital gains taxes

To help reduce long-term capital gains taxes, consider these ideas:

Tax-loss harvest

Tax-loss harvesting allows you to sell investments that are down and use those realized capital losses (meaning you sold for less than the purchase price) to offset the realized capital gains generated by other investments. Remaining net losses can be used to offset ordinary income, generally up to $3,000, and unused losses thereafter can be carried forward to future years.

If you use a tax-loss harvesting strategy, be careful about any other investments you buy in the 30 days before or after you sell an investment at a loss. If the investments are deemed "substantially identical," the IRS may consider them a "wash-sale," meaning you won't be able to write off the loss. Tax-loss harvesting can be complicated to implement, so consider discussing with a financial professional.

The result is that less of your money goes to taxes and more may stay invested and working for you.

As an example, let's say you have a long-term capital loss of $12,000 but a long-term capital gain of $5,000. You offset that gain with some of the loss, leaving you with $7,000 in losses. You could use $3,000 to reduce ordinary income that tax year and the remaining $4,000 in losses to offset capital gains and/or income in the following tax years.

Note that if you invest in mutual funds and they sell investments within the fund that cause you to incur short-term capital gains, you won't be able to offset these with losses and you'll have to pay any applicable taxes. You can still tax-loss harvest to offset any long-term capital gains that your fund investments incur and pass onto you, though.

Related: Tax-Loss Harvesting ToolLog In Required (login required)

Sell within tax-advantaged accounts

That way, you won't pay taxes until you make withdrawals, if ever. In the case of 529s, HSAs,³ and Roth IRAs, if you follow account rules, such as using the money for qualified medical expenses or satisfying age and holding period rules, withdrawals are federal tax–free (and may be free from state tax too). Using an asset location strategy can potentially help to improve after-tax returns.

Time your sales

Because your capital gains tax rate depends on your income, you might consider selling profitable investments when your income is low, like after a job loss or in retirement, if you're flexible on the timing of selling your investment.

Long-term capital gains tax on different types of assets

Rules about long-term capital gains taxes vary by the kind of asset you sell. Here's what to know about a few common types of assets.

Real estate

When you sell a primary residence for more than you bought it for, you may exclude up to $250,000 in gains as a single filer and up to $500,000 if married filing jointly, provided you owned and lived in the residence for at least 2 of the 5 years before the sale date. You generally would not qualify for this exclusion if you have already done this for the sale of another home within the last 2 years before the sale of your home.

If your gains are more than the exclusion, you can increase your cost basis—or what you originally paid for the residence plus fees and closing costs—by adding in costs for capital improvements such as room additions or putting in heating and air conditioning systems or new flooring. Repairs and maintenance that don't add value or extend a home's life do not count.

For real estate investors, one way to defer capital gains tax on the sale of an investment property is in a transaction known as a 1031 exchange. This is when you reinvest the profits from the sale of your home in another similar property. Consult with a real estate or tax attorney before attempting.

Qualified small business stock

Capital gains tax on the sale of qualified small business stock (QSBS) can reach a maximum of 28%. If you've held the stock for more than 5 years, you don't have to count some of the gains as income, but whatever is taxable is subject to as much as a 28% tax.

Collectibles

That same 28% maximum rate applies to gains made from selling collectibles, which can include: artwork, rugs, antiques, metals (e.g. gold, silver, and platinum bullion), gems, stamps, coins, or alcoholic beverages you've held for more than a year.

Long-term capital gains state taxes

In addition to capital gains federal tax, you may have to pay capital gains state tax, depending on where you live. Generally, most states tax gains as ordinary income, with these exceptions:

• 7 states that tax gains less than ordinary income: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, and Wisconsin
• 2 states that tax gains more than ordinary income for high earners: Minnesota and Washington (though the latter doesn't tax ordinary income)
• Missouri became the first state to exempt capital gains from income tax, effective January 1, 2025
• 8 states that don't tax capital gains or income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming

_{This information is based on 2025 tax year data.}