Capital gains tax explained
Key takeaways
Tax on profits from selling assets.
Short-term (1 year or less) taxed at ordinary income rates; long-term (over a year) taxed at lower rates (0%-20%).
Based on taxable income and filing status.
When you invest in an asset, you do so in the hope that you can sell it for more than you originally paid. The IRS refers to that profit as “capital gains.”
However, any profit you make from the sale of your investment is considered taxable income. That’s where capital gains tax comes in. The amount you must pay depends on many complex factors. That’s why people typically need the complexities of capital gains tax explained to create a sound tax strategy.
In this guide, we’ll define capital gains tax and answer your most frequently asked questions. Continue reading to learn what you need to know to effectively pay (and even reduce) the capital gains tax you owe this year.
What is capital gains tax?
If you sell a non-inventory asset and make a profit, you will owe the IRS capital gains tax on the profit you make.
Assets typically subject to capital gains tax include:
- Stocks and bonds
- Real estate (except primary residence exclusions)
- Cryptocurrency
- Mutual funds and ETFs
- Collectibles (art, antiques, coins, etc.)
- Business assets
- Precious metals (gold, silver, etc.)
- Intellectual property (if sold for a profit)
In some cases, the type of asset impacts the amount of tax you owe.
For example, depending on the terms, the sale of intellectual property may be classified as ordinary income. Collectibles and precious metals typically have a higher capital gains tax rate, regardless of your income level. Real estate and business assets may apply for special exemptions or deductions that can reduce your tax burden.
Other than the type of asset, a few other elements determine how much capital gains tax you must pay. Your income level tax bracket, and the length of time you’ve held the asset are both significant factors.
There are two basic categories of capital gains tax: short-term capital gains tax and long-term capital gains tax. We’ll explain both types below.
Short-term capital gains tax
You will owe short-term capital gains tax on any asset you have owned for one year or less. These profits will be taxed at your ordinary income tax rate.
In other words, the more income you earn, the more capital gains tax you will owe. This is significant for those in the highest tax brackets. For high-income individuals, it often pays to wait to sell assets.
Long-term capital gains tax
You will owe long-term capital gains tax on any asset you have owned for over one year. Compared to short-term capital gains, long-term tax rates tend to be lower and more manageable.
While the total tax owed is based on your income level, rates typically range from 0% up to 20%. Compare that to short-term capital gains, which may be taxed at up to 37% for those in the highest income tax bracket. Thus, holding assets for over a year may often, but not always, results in lower taxes.
What is the current capital gains tax rate?
The tax rate on capital gains held for a year or less is equivalent to your ordinary income tax rate. However, the tax rate on long-term capital gains is based on your taxable income and filing status.
The table below shows the capital gains tax rate for assets sold in the year 2025. These must be reported on your taxes in the year 2026.
$0 to $48,350 | $0 to $96,700 | $0 to $48,350 | $0 to $64,750 | 0% |
$48,351 to $533,400 | $96,701 to $600,050 | $48,351 to $300,000 | $64,751 to $566,700 | 15% |
$533,401+ | $600,051+ | $300,001+ | $566,701+ | 20% |
Be aware that these numbers have increased since 2024. If you are filing your 2024 taxes in the year 2025, please consult the IRS for the most current figures.
How to reduce your capital gains tax
You can reduce your capital gains tax liability in several ways. Each method is a legal, recognized strategy for lowering your tax burden.
Strategies include:
- Holding investments for more than a year. Long-term capital gains have lower tax rates.
- Using tax-advantaged accounts. Assets held in retirement accounts (e.g., IRAs, 401(k)s) grow tax-free or tax-deferred.
- Offsetting your capital gains with capital losses. This strategy is known as tax-loss harvesting. Essentially, you can deduct losses from other investments to reduce taxable gains.
- Taking advantage of exemptions. The sale of a primary residence may qualify for a capital gains tax exclusion. You may save up to $250,000 for single filers or $500,000 for married couples.
There are several other exemptions you may be able to take advantage of, too. For example, a 1031 exchange in real estate involves reinvesting proceeds into a similar property. In such cases, your taxes will be deferred until the new property is sold.
We recommend speaking to a qualified tax professional for advice about reducing your capital gains tax burden. They can help you identify opportunities that may reduce your liability and explain capital gains tax exemptions.
Reduce your tax burden with tips from Raisin
As an investor, it’s crucial to understand capital gains tax and the role it plays. By understanding tax rates and making a strategic plan, you can reduce your tax liability. Ultimately, that places more of your hard-earned profits in your pocket.
Learn more about taxes and how taxation works with Raisin's Tax Guide.
Related Content
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
Sources consulted:
- https://www.irs.gov/taxtopics/tc409
- https://www.irs.gov/taxtopics/tc701
- https://taxfoundation.org/data/all/federal/2025-tax-brackets/
- https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
- https://www.wsj.com/personal-finance/taxes/homeowners-taxes-benefits-credits-guide-1fbf1fac
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