When you own something, it’s probably a capital asset. Capital assets are anything you own for personal use or as an investment. It could be a couch, a car, your house, a stock, a bond, or almost anything else.
When you sell it, you make money or you lose money. The difference between what you paid for it and the price you sold it for is a capital gain or loss. (That’s a bit of an oversimplification, since you may have received something as a gift and then sold it.)
Depending on how much you earned, how long you owned it, and some other factors, you may owe capital gains taxes. On the other hand, you may be able to deduct some of your losses.
There are two types of capital gains, short-term and long-term.
If you own an asset for a year or less, it is short-term. Anything longer than that is long term.
The amount of taxes you may or may not owe depends on how long you have owned the asset. It’s called the holding period.
To determine your holding period, count from the day after you acquired the asset up to and including the day you disposed of it. That assumes you know the date, but if the asset was a gift, inheritance, or something else, you may not know it. (We’ll address those rules in the adjusted basis section.)
Tax rates differ for short-term and long-term capital gains. Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income. Short-term gains are taxed as regular income at 10%, 12%, 22%, 24%, 32%, 35% or 37%.
The bottom line for taxpayers: You’ll likely owe less taxes when you hold an asset for the long term.
You owe taxes when you have a net capital gain. Calculating it involves some math.
Take your net long-term capital gains for the year and subtract your net short-term capital losses for the year. The result is your net capital gain.
So, if you have $15,000 in net long-term capital gains and $5,000 in net short-term capital losses, you will owe capital gains taxes on $10,000. The amount you would actually pay depends on your overall income; We’ll talk about that later.
Here you have the long-awaited adjusted form section.
The basis is what you paid for something. You need that number to calculate many things, including profits or losses when you sell.
If you buy a stock or bond, the basis is the price, plus any commissions and registration or transfer fees. If you have a stock or bond that you didn’t purchase, you determine its price by looking at the fair market value of the stock or bond on the day it was transferred to you. You can also use the previous owner’s adjusted basis if you have it.
“A common mistake is not considering the cost basis or misreporting it (possibly due to a lack of documentation to support the basis),” said Garrett Watson, director of Policy Analysis at the Tax Foundation. “(Doing so) could overstate the tax liability or, in some cases, understate it if the basis is reported as too high. It is important to get these details right with thorough documentation.”
Whether or not you owe taxes on your net capital gain depends on your income level, so the tax rate differs depending on how much you earn. The more you earn in income, the higher your capital gains tax rate will be.
These rates are for taxes due before April 15, 2026 (for assets sold in 2025).
| TAX RATE | SINGLE | HEAD OF HOUSEHOLD | MARRIED FILING JOINTLY | MARRIED FILING SEPARATELY |
|---|---|---|---|---|
| 10% | Taxable income up to $48,350 | Taxable income up to $64,750 | Taxable income up to $96,700 | Taxable income up to $48,350 |
| 15% | $48,351-$533,400 | $64,751-$566,700 | $96,701-$600,050 | $48,350-$300,000 |
| 20% | $533,401 and up | $566,701 and up | $600,051 and up | $300,001 and up |
These rates are for taxes due before April 15, 2027 (for assets sold in 2026).
| TAX RATE | SINGLE | HEAD OF HOUSEHOLD | MARRIED FILING JOINTLY | MARRIED FILING SEPARATELY |
|---|---|---|---|---|
| 10% | Taxable income up to $49,450 | Taxable income up to $66,200 | Taxable income up to $98,900 | Taxable income up to $49,450 |
| 15% | $49,451-$545,500 | $66,201-$579,600 | $98,901-$613,700 | $49,451-$306,850 |
| 20% | $545,501 and up | $579,601 and up | $613,701 and up | $306,851 and up |
Keep in mind that you generally don’t have to pay capital gains taxes if your gain is only on paper. You only have to pay when the profit is realized (when you sell the asset). If you have not sold it, the profit is not realized.
Read more: Here’s How to Calculate Capital Gains on Real Estate
If your capital losses exceed your capital gains, you can use them to reduce your income. You can claim the lesser of $3,000 or your total net loss.
If your net capital losses exceed that limit, you may be able to carry the loss forward to later tax years and use it to offset some gains at that time.
If you have capital gains or losses to report on your taxes, you will need to complete some forms that will accompany your Form 1040 or Form 1040-SR.
The first is Form 8949, Sales and Other Disposals of Capital Assets. Use this form to collect all the numbers from any 1099-B or 1099-S returns you receive about stocks or other market transactions so that you can report that number on your Form 1040.
Form 1099-B is a statement that reports sales of brokerage accounts. The brokerage or financial institution that made the transaction must send you the form and also sends it to the IRS. Form 1099-S is for real estate transactions.
There are two sections: one for short-term profits and another for long-term profits. In both, you will need a description of what you sold, when you acquired and sold it, the cost basis, and any adjustments. From that, you will subtract to get the profit and loss amount.
You will add all the wins and losses to get a total of both types of wins.
Once you have your short-term and long-term earnings totals, you’ll transfer those numbers to Schedule D of Form 1040.
Again, there are separate sections to report short-term and long-term gains, as well as any remaining losses.
At the bottom of the form, you’ll do some calculations and follow other instructions to get the numbers you’ll enter on Form 1040 or Form 1040-SR.
The last step is to take the number you get from this form and put it on line 7 of Form 1040.
Note: Consider consulting with a tax professional, as calculating capital gains taxes can be complex.
Look on the bright side: you made money, even if you have to pay some capital gains taxes. But there are some strategies you can use to reduce those taxes.
Since the tax rate is lower for long-term capital gains than short-term capital gains, it makes sense to try to hold onto an asset for at least a year.
You always hear why it’s good to invest in a 401(k) or other retirement plan. Here’s another one: These accounts grow tax-free or tax-deferred, meaning you don’t have to worry about taxes.
“Taxes associated with short-term gains and dividends are deferred until withdrawals are made to traditional accounts,” explained the Tax Foundation’s Watson.
This strategy also includes investments in traditional IRAs, Roth IRAs, 529 savings plans, health savings accounts, and others.
More information: FSA vs. HSA: Which Account is Right for You?
We don’t talk much about capital gains on home sales, but maintaining and using your home as your primary residence for at least two years out of the last five could allow you to exclude some of the gain that comes from the sale of the home.
If you qualify, you can exclude up to $250,000 if you are single or $500,000 if you are married filing jointly.
Tax-loss harvesting is a strategy in which you sell something at a loss to offset gains made in other investments and then reinvest that money in a similar investment.
It’s a complex strategy with many rules and regulations about timing, what you can and can’t invest in, and more. It is best to seek professional advice because if done correctly, you can save a lot of money on taxes.
As with many tax concepts, capital gains can be a bit confusing. It’s okay to ask for help.
“A tax professional can help determine the proper gross receipts and cost basis for determining taxes owed, which in itself can be very helpful and result in tax savings,” Watson said.
Another scenario where a professional can help is figuring out the “step-up basis” rule, “where the cost basis of an asset is set at fair market value when it is inherited,” Watston explained. “This could still result in a tax bill if there is a realized gain above the fair market value at the time of sale, but it may be much less than expected if someone is not familiar with how basis adjustments work.”
A capital gains tax is a tax you pay on the difference between what you paid for an asset and what you earned when you sold it.
What is the difference between short-term and long-term capital gains?
The amount of time you hold the asset determines whether it is a short-term or long-term gain. A year or less is short-term and more than a year is long-term.
Tax rates are different for short-term and long-term capital gains and depend on your taxable income. Long-term capital gains are taxed at 0%, 15% or 20%. Short-term gains are taxed as regular income at 10%, 12%, 22%, 24%, 32%, 35% or 37%.
You pay capital gains when you sell the investment (make the sale).