Capital Gains Tax Rules and Rates (US)

Capital gains tax is a federal income tax applied to profit realized from the sale of a capital asset — such as stock, real estate, or a business interest — when the sale price exceeds the asset's adjusted cost basis. The Internal Revenue Service administers the rules under the Internal Revenue Code (IRC), with rates and holding-period thresholds set by statute and periodically adjusted by legislation. Understanding the classification of gains, applicable rates, and statutory exclusions is essential for accurate individual income tax filing and investment planning across the United States.

Definition and scope

A capital gain arises when a taxpayer disposes of a capital asset for more than its adjusted basis. The adjusted basis generally equals the original purchase price plus acquisition costs, plus any capital improvements, minus depreciation previously claimed (IRS Publication 551, Basis of Assets). The gain equals the amount realized — sale price minus selling expenses — less the adjusted basis.

IRC Section 1221 defines a capital asset broadly as property held by a taxpayer, with specific exclusions for inventory, accounts receivable, depreciable business property, and certain copyrights. Most investment assets — equities, mutual fund shares, bonds, collectibles, and real property held for investment — fall within the capital asset definition.

Scope is national: all U.S. persons, including citizens, resident aliens, and domestic corporations, are subject to federal capital gains tax. Non-resident aliens face a separate withholding regime under IRC Section 1441. State-level capital gains taxes vary by jurisdiction and are layered on top of federal liability; they are outside the scope of this page.

How it works

The federal tax treatment of a capital gain hinges on two primary variables: holding period and taxpayer income level.

1. Short-term vs. long-term classification

• Short-term capital gains (STCG): Gains on assets held 12 months or fewer. Taxed as ordinary income at the taxpayer's marginal rate under federal tax brackets, which ranged from 10% to 37% for tax year 2023 (IRS Rev. Proc. 2022-38).
• Long-term capital gains (LTCG): Gains on assets held longer than 12 months. Eligible for preferential rates of 0%, 15%, or 20%, depending on taxable income (IRC Section 1(h)).

2. Long-term rate thresholds (2023, single filers)

For 2023, per IRS Revenue Procedure 2022-38:

1. 0% rate — Taxable income up to $44,625
2. 15% rate — Taxable income from $44,626 to $492,300
3. 20% rate — Taxable income above $492,300

Married filing jointly thresholds are $89,250 (0%), $89,251–$553,850 (15%), and above $553,850 (20%).

3. Additional taxes that stack on LTCG

The Net Investment Income Tax (NIIT) adds a 3.8% surcharge on net investment income — including capital gains — for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), per IRC Section 1411. This can push the effective federal rate on long-term gains to 23.8% for high-income taxpayers.

4. Reporting mechanism

Taxpayers report capital gains and losses on IRS Schedule D and the supporting Form 8949. Gains and losses from each transaction are netted within each category. Net losses in the long-term category can offset net gains in the short-term category, and vice versa. A net capital loss of up to $3,000 per year may offset ordinary income, with excess carried forward to future tax years indefinitely (IRS Publication 550).

Common scenarios

Primary residence sale exclusion

Under IRC Section 121, a taxpayer may exclude up to $250,000 ($500,000 for married filing jointly) of gain from the sale of a principal residence, provided the taxpayer owned and used the home as a primary residence for at least 24 months out of the 60 months preceding the sale. Gain exceeding the exclusion is taxable. This exclusion interacts with real estate tax rules and depreciation recapture rules when the property was ever used for business purposes.

Stock and mutual fund sales

Sales of publicly traded equities trigger capital gains based on the difference between proceeds and cost basis. For shares acquired at different prices, taxpayers may elect specific identification, FIFO (first-in, first-out), or average cost methods — with different methods producing different gain or loss outcomes. Mutual fund distributions that include embedded capital gains are also taxable in the year received, even when reinvested.

Collectibles and qualified small business stock

Collectibles — including art, coins, and precious metals — held long-term face a maximum federal rate of 28% rather than 20%, per IRC Section 1(h)(4). Qualified Small Business Stock (QSBS) under IRC Section 1202 may qualify for a 50% to 100% gain exclusion for stock held more than 5 years in a qualifying C corporation, subject to statutory ceilings.

Cryptocurrency

The IRS treats cryptocurrency as property, not currency, per IRS Notice 2014-21. Each disposal — sale, exchange, or use in a transaction — is a taxable event subject to capital gains rules. Holding period rules apply identically to digital assets. More detail on this asset class is covered in cryptocurrency tax treatment.

Like-kind exchanges

IRC Section 1031 permits deferral of capital gains on real property if proceeds are reinvested in qualifying "like-kind" property within prescribed time limits. After the Tax Cuts and Jobs Act of 2017, this deferral is limited to real property only; it no longer applies to personal property or equipment. The mechanics are covered in depth at like-kind exchange (1031).

Decision boundaries

Capital gains tax liability depends on a sequence of classification decisions:

1. Is the asset a capital asset? If excluded under IRC Section 1221 (e.g., inventory, receivables), ordinary income rules apply instead.
2. What is the holding period? The 12-month threshold determines short-term vs. long-term treatment. The holding period begins the day after acquisition.
3. What is the adjusted basis? Incorrect basis calculation — especially after stock splits, dividend reinvestment, or inherited assets — is a leading source of reporting errors. Inherited assets receive a stepped-up basis to fair market value at the date of death (IRC Section 1014), which is a critical distinction from gifted assets, which carry the donor's original basis.
4. Does a statutory exclusion apply? Section 121 (primary residence), Section 1031 (like-kind exchange), or Section 1202 (QSBS) can reduce or eliminate the taxable gain.
5. Is NIIT applicable? Income thresholds determine whether the additional 3.8% applies on top of the standard long-term rate.
6. Are special rates in play? Collectibles (28% cap) and unrecaptured Section 1250 depreciation (25% cap) follow separate rate tracks within the long-term gain regime.
7. How are losses netted? Short-term losses offset short-term gains first; long-term losses offset long-term gains first. Cross-category netting is allowed only after within-category netting is completed.

Depreciation recapture under IRC Section 1250 applies when depreciable real property is sold at a gain — the portion of gain attributable to prior depreciation is taxed at a maximum rate of 25%, which is higher than the standard 0%/15%/20% long-term rate. Taxpayers who have claimed depreciation and amortization deductions on real property should account for this when projecting sale proceeds.

The alternative minimum tax (AMT) can also interact with capital gains in specific circumstances, particularly for taxpayers with large QSBS exclusions, as the excluded gain is an AMT preference item under IRC Section 57(a)(7).

References

• IRS Publication 550 — Investment Income and Expenses
• IRS Publication 551 — Basis of Assets
• IRS Schedule D Instructions
• IRC Section 1 — Tax Imposed (via Cornell LII)
• IRC Section 1221 — Capital Asset Defined (via Cornell LII)
• IRC Section 1411 — Imposition of Tax (NIIT) (via Cornell LII)
• [IRS Notice 2014-21 — Virtual Currency Guidance](https://www.irs.gov/pub/irs-irs-drop/n-14-21.