A tax levied upon the sale of an asset is known as a capital gains tax. For the 2025 tax year, the long-term capital gains tax rates are 0%, 15%, or 20% of the profit, contingent on the filer’s income.
Key Takeaways
- Only once an investment is sold are capital gains taxes due.
- Only capital assets—such as stocks, bonds, digital assets like NFTs and cryptocurrencies, jewelry, coin collections, and real estate—are subject to capital gains taxes.
- Profits from investments held for more than a year are subject to long-term gains.
- Short-term profits are subject to a higher tax rate than long-term gains, which is the individual’s ordinary income tax rate.
Understanding Capital Gains Tax
The capital gains, or profits, are said to have been realized when stock shares or any other taxable investment assets are sold. Unrealized capital gains and unsold investments are exempt from the tax. No matter how long they are held or how much their value rises, stock shares will not be subject to taxes until they are sold.
The majority of taxpayers pay a greater tax rate on their income than any potential long-term capital gains. Because the tax on the profit will be lower after a year, they have a financial incentive to hang onto their investments.
Profits from purchasing and selling assets kept for less than a year are not only subject to taxes, but they are also subject to higher taxes than those from long-term assets. This is important for day traders and other individuals who benefit from the convenience and speed of online trading.
Capital Gains Tax Rates
For tax reasons, the profit from the sale of an asset that is acquired less than a year later is typically treated like wages or a salary. These gains are included on your tax return as ordinary income or earned income.
The same is typically true for dividends that an asset pays out; while they aren’t capital gains, they nonetheless represent profit. Dividends are taxed as regular income for taxpayers in the 15% and higher tax levels in the United States.
Long-term capital gains, however, are subject to a separate regime. A rate schedule that is dependent on the taxpayer’s taxable income for that year determines the tax you pay on assets held for more than a year and sold at a profit. Every year, the rates are modified to account for inflation.
Calculating Your Capital Gains
If you’ve seen capital gains and losses on both short-term and long-term investments, the computation gets a little trickier. First, place short-term and long-term gains and losses in different piles. To determine the overall short-term gain, all short-term gains must be balanced. After that, the short-term losses are added together. Long-term profits and losses are finally totaled.