Capital Gains Tax

Capital gains tax is levied on the profit you make when you sell an investment for more than you paid for it. The tax rate depends on how long you held the asset before selling, creating two distinct categories: short-term and long-term capital gains.

Short-term capital gains apply to assets held for one year or less. These gains are taxed at your ordinary income tax rate, which can be as high as 37% for federal taxes. Long-term capital gains apply to assets held for more than one year and benefit from lower rates — 0%, 15%, or 20% depending on your taxable income.

The distinction between short-term and long-term creates a strong incentive to hold investments for at least one year before selling. For an investor in the 32% tax bracket, the difference between short-term and long-term rates on a $10,000 gain could be $1,700 in additional tax.

Capital gains taxes apply to stocks, bonds, real estate, crypto, and virtually any asset sold at a profit. Capital losses can offset capital gains, and up to $3,000 in net losses can offset ordinary income each year, with excess losses carried forward to future years.

State capital gains taxes vary widely — some states like Florida and Texas have no state income tax, while California taxes capital gains as ordinary income at rates up to 13.3%. Understanding both federal and state implications is important for tax planning.