Capital gains tax is the tax owed on the profit (gain) from selling an asset — such as stocks, real estate, or cryptocurrency — for more than you paid for it.
How Capital Gains Tax Works
When you sell an asset for a profit, the gain is classified as either short-term (held ≤ 1 year) or long-term (held > 1 year). Short-term gains are taxed as ordinary income (up to 37%). Long-term gains receive preferential rates: 0%, 15%, or 20% depending on your taxable income.
2025 Long-Term Capital Gains Rates
- 0%: Single filers up to $48,350 taxable income
- 15%: $48,351 to $533,400
- 20%: Over $533,400
High earners may also owe a 3.8% Net Investment Income Tax (NIIT) on top of these rates.
Real-World Example
You bought 100 shares at $50 ($5,000) and sell 2 years later at $80 ($8,000). Your long-term capital gain is $3,000. At the 15% rate, you owe $450 in capital gains tax, keeping $2,550 of your $3,000 profit.
Frequently Asked Questions
How can I reduce capital gains tax?
Hold investments over 1 year for lower long-term rates, use tax-loss harvesting to offset gains with losses, maximize contributions to tax-advantaged accounts (IRA, 401k), and consider the primary residence exclusion ($250k/$500k) for home sales.
Do I pay capital gains on my primary residence?
You can exclude up to $250,000 of gain ($500,000 for married couples) from the sale of your primary residence if you lived there at least 2 of the last 5 years. Gains above the exclusion are taxed.
Are capital gains taxes owed on inherited property?
Inherited assets receive a "stepped-up basis" to their fair market value at the date of death. You only owe capital gains tax on appreciation after you inherited the asset, not on the original owner gains.