Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
Fact checked by Fact checked by Suzanne KvilhaugSuzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Part of the Series Federal Income Tax GuideTax Credits and Deductions
Retirement and Your Taxes
It’s easy to get caught up in choosing investments and forget about the tax consequences—particularly, the capital gains tax. After all, picking the right stock or mutual fund can be challenging enough without worrying about after-tax returns. Likewise, selling a home can be a daunting task, even before you consider the tax bill.
Still, figuring taxes into your overall strategy—and timing when you buy and sell—is crucial to getting the most out of your investments. Here, we look at the capital gains tax and what you can do to minimize it.
A capital gain is the increase in value of a capital asset when it is sold. Whenever you sell an asset for more than what you originally paid for it, the difference between those two prices is the capital gain.
Lots of different types of assets that you might own are capital assets, including investments (like a stock, bond, or real estate) or something purchased for personal use (like furniture or a boat).
Capital gains are only realized when you sell an asset. The Internal Revenue Service (IRS) taxes individuals on gains from the sale under certain circumstances.
Just as the government wants a cut of your income, it also expects a cut when you realize a profit—aka a "capital gain"—on your investments. That cut is the capital gains tax.
For tax purposes, it’s helpful to understand the difference between unrealized gains and realized gains. An unrealized gain is a potential profit that exists on paper—an increase in the value of an asset or investment you own but haven't yet sold for cash. For example, say you buy some stock in a company, and a year later, it’s worth 15% more than you paid for it. Although your investment has increased in value by 15%, that gain is unrealized since you still own the stock.
On the other hand, a gain becomes realized when you sell the asset or investment at a profit—that is, for more than its basis. For instance, you realize a gain of $5,000 if you sell that stock for $25,000 after paying $20,000 for it. A tax on capital gains only happens when an asset is sold or "realized."
Investors can also have unrealized and realized losses. An unrealized loss is a decrease in the value of an asset or investment you own but haven't yet sold—a potential loss that exists on paper. A realized loss happens when you sell an asset or investment for less than you paid for it (i.e., at a loss).
Capital gains taxes apply to what are known as capital assets. Examples of capital assets include:
However, not every capital asset you own will qualify for capital gains treatment. Examples of noncapital assets include:
Also excluded from capital gains treatment are certain self-created intangibles, such as:
The Tax Cuts and Jobs Act (TCJA), passed in December 2017, excludes patents, inventions, models, designs (patented or not), and any secret formulas sold after Dec. 31, 2017, from being treated as capital assets for capital gain/capital loss tax purposes.
Say you bought 100 shares of XYZ Corp. stock at $20 per share and sold them more than a year later for $50 per share. Let’s also assume that you fall into the income category where your long-term gains are taxed at 15%. The table below summarizes how your gains from XYZ stock are affected.
| How Capital Gains Affect Earnings | |
|---|---|
| Bought 100 shares @ $20 | $2,000 |
| Sold 100 shares @ $50 | $5,000 |
| Capital gain | $3,000 |
| Capital gain taxed @ 15% | $450 |
| Profit after tax | $2,550 |
In this example, $450 of your profit will go to the government. But it could be worse. Had you held the stock for one year or less (making your capital gain a short-term one), your profit would have been taxed at your ordinary income tax rate, which can be as high as 37% for tax years 2023 and 2024. And that’s not counting any additional state taxes.
The tax you’ll pay on a capital gain depends on how long you hold the asset before selling it.
Assets you hold for more than one year qualify for the more favorable long-term capital gains rates. In contrast, gains on investments you’ve held for one year or less are short-term capital gains, which are taxed at your higher, ordinary income tax rate (there are limited exceptions to the one-year holding-period rule).
The tax system in the U.S. benefits long-term investors. Short-term investments are almost always taxed at a higher rate than long-term investments.
Short-term capital gains are taxed at ordinary income tax rates up to 37% (the seven marginal tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%). By contrast, long-term capital gains are taxed at different, generally lower rates. The capital gains rates are 0%, 15%, and 20%, depending on your taxable income. Here's a breakdown for tax years 2023 and 2024:
| Long-Term Capital Gains Tax Rates for 2024 | |||
|---|---|---|---|
| Filing Status | 0% | 15% | 20% |
| Single | Up to $47,025 | $47,026 to $518,900 | Over $518,900 |
| Head of household | Up to $63,000 | $63,001 to $551, 350 | Over $551,350 |
| Married filing jointly or surviving spouse | Up to $94,050 | $94,051 to $583,750 | Over $583,750 |
| Married filing separately | Up to $47,025 | $47,026 to $291,850 | Over $291, 850 |
Although marginal tax brackets have changed over the years, historically the maximum tax on ordinary income has almost always been significantly higher than the maximum rate on capital gains.
Not all capital gains are taxed according to the standard 0%/15%/20% schedule. Here are some exceptions where capital gains may be taxed at higher rates than 20%:
The winner of the presidential election in November 2024 has an opportunity to change tax policy in the U.S., beginning in 2025, and that includes capital gains.
There is no mention of capital gains taxes in the 2024 Republican Party platform or on Agenda 47, a website for former President Trump. But Project 2025, the 900-plus page agenda that has been dubbed a blueprint for the next Republican president, calls for a 15% maximum long-term capital gains tax rate, essentially eliminating the top rate of 20%. Although Trump has distanced himself from Project 2025, it's clear he hopes to lower taxes beyond what was passed in the 2017 Tax Cuts and Jobs Act (TCJA) when he was last in office.
If Kamala Harris were to win the presidential election, she has proposed raising the capital gains rate on high earners to 28%, which is a lot less than the 39.6% that President Biden had proposed for households with income over $1 million. And regardless of what Trump or Harris ultimately proposes, control of Congress will be key in pushing through new legislation.
Capital gains on long term investments are treated more favorably than those on short term investments by the U.S. Tax Code. The tax rates for long term gains, which range from 0% to 20%, are determined by your tax filing status and your taxable income. Taxable income is your adjusted gross income (AGI) minus either the standard deduction or allowable itemized deductions.
As an example, if you are married filing jointly and your taxable income is $176,000 in 2024, your long term capital gains tax rate will be 15%. You would have to make less than $94,050 as a couple to pay a capital gains tax rate of 0%.
As mentioned above, the tax treatment of short term capital gains isn't as beneficial to an investor as that of long term capital gains. Instead of being taxed at a rate of 0%, 15%, or 20%, depending on income and tax filing status, short term capital gains are taxed at the same rates as ordinary income, which is between 10% and 37%.
Following from the example just above, the short term capital gains tax rate for a couple making $176,000 and filing jointly would be 22% in 2024. If you can, it pays to hold investments for over a year in order to avoid paying higher taxes on your investment gains.
The amount of capital gains you pay on the sale of property depends on whether the property is your principal residence (and how long you lived there) or a rental or investment property.
Due to a special exclusion, capital gains on the sale of a principal residence are taxed differently than other types of real estate. Basically, if you sell your main home and have a capital gain, you can exclude up to $250,000 of that gain from your income, provided you owned and lived in the home for two years or more out of the last five years. (The years don't have to be consecutive.) For married couples filing jointly, the exclusion is $500,000.
Let's say you and your spouse purchased your home for $400,000 and lived in it for seven years. If you now sell it for $675,000, your profit is $275,000, which means that you won't owe the IRS any capital gains taxes on the sale, given the $500,000 exclusion for married couples.
However, a rental property doesn't qualify for the same exclusion on capital gains taxes as a primary residence does. If you sell a rental property that you've owned for more than a year and for a higher price than you paid for it, the IRS requires that you pay a 25% depreciation recapture on the portion of your profit that you previously deducted as depreciation. You'll also have to pay long-term capital gains on the profit balance at a rate of 0%, 15%, or 20%, depending on your income—assuming you have owned the property for more than a year. If you've owned if for less time than that, any profit you make will be taxed at your ordinary income tax rate.
It is possible to reduce your capital gains tax on the sale of a rental property if you plan ahead—for example, by establishing it as your primary residence for at least two years prior to any sale. Consult a tax expert for advice on other methods.
In addition to regular capital gains tax, some taxpayers are subject to the net investment income (NII) tax. It imposes an additional 3.8% tax on your investment income, including your capital gains, if your modified adjusted gross income (MAGI) is greater than:
Most individuals figure their tax (or have pros do it for them) using software that automatically makes the computations. You can also use a capital gains calculator to get a rough idea. Several free calculators are available online. Still, if you want to crunch the numbers yourself, here's the basic method for calculating capital gains tax:
There are a number of ways to minimize or even avoid capital gains taxes. Here's a look at five of the more common strategies:
You will pay the lowest capital gains tax rate if you find great companies and hold their stock long-term. Of course, this is easier said than done. A company’s fortunes can change over the years, and there are many reasons why you might want or need to sell earlier than you originally anticipated.
When you invest your money through a retirement plan, such as a 401(k), 403(b), or individual retirement account (IRA), it will grow without being subject to immediate taxes. You can also buy and sell investments within your retirement account without triggering capital gains tax.
In the case of traditional retirement accounts, your gains will be taxed as ordinary income when you withdraw money, but by then, you may be in a lower tax bracket than when you were working. With Roth IRA accounts. However, the money you withdraw will be tax-free—as long as you follow the relevant rules.
For investments outside of these accounts, it might behoove investors near retirement to wait until they stop working to sell. If their retirement income is low enough, their capital gains tax bill might be reduced, or they may be able to avoid paying any capital gains tax. But if they’re already in one of the “no-pay” brackets, there’s a key factor to keep in mind: If the capital gain is large enough, it could increase their total taxable income to a level where they would incur a tax bill on their gains.
Capital losses can offset your capital gains as well as a portion of your regular income. Any amount left over after what you are allowed to claim for one year can be carried over to future years.
If you experience an investment loss, you can take advantage of it by decreasing the tax on your gains on other investments. Say you own two stocks, one worth 10% more than you paid for it, while the other is worth 5% less. If you sold both stocks, the loss on the one would reduce the capital gains tax that you would owe on the other. Obviously, in an ideal situation, all of your investments would appreciate, but losses do happen, and this is one way to get some benefit from them.
If your capital losses exceed your capital gains, you can use up to $3,000 of it to offset ordinary income for the year. After that, you can carry over the loss to future tax years until it is exhausted.
If you are selling a security that you bought about a year ago, be sure to find out the trade date of the purchase. Waiting a few days or weeks to qualify for long-term capital gains treatment might be a wise move as long as the investment's price is holding relatively steady.
When you’ve acquired shares in the same company or mutual fund at different times and prices, you’ll need to determine your cost basis for the shares you sell. Although investors typically use the first in, first out (FIFO) method to calculate cost basis, there are four other methods available: last in, first out (LIFO), dollar-value LIFO, specific share identification, and average cost (only for mutual fund shares).
If you’re selling a substantial holding, it could be worth consulting a tax advisor to determine which method makes the most sense to use.
If you have less than a $250,000 gain on the sale of your home (or $500,000 if you’re married filing jointly), you will not have to pay capital gains tax on the sale of your home. You must have lived in the home for at least two of the previous five years to qualify for the exemption (which is allowable once every two years). If your gain exceeds the exemption amount, you will have to pay capital gains tax on the excess.
For most assets, your basis is your capital investment in the asset. For example, it is your purchase price plus additional costs that you incurred, such as commissions, recording fees, or transfer fees. Your adjusted basis can then be calculated by adding to your basis any costs that you’ve incurred for additional improvements and subtracting depreciation that you’ve deducted in the past and any insurance reimbursements that have been paid out to you.
Capital gains tax rates are the same in 2024 as they were in 2023: 0%, 15%, or 20%, depending on your income. The higher your income, the higher your rate. While the tax rates remain unchanged for 2024, the income required to qualify for each bracket goes up to adjust for inflation. The maximum zero-rate taxable income amount is $94,050 for married filing jointly and surviving spouses, $63,000 for heads of household, and $47,025 for single or married filing separately taxpayers.
Although the tax tail should not wag the entire financial dog, it’s important to take taxes into account as part of your investing strategy. Minimizing the capital gains taxes you have to pay—for example, by holding investments for more than a year before you sell them—is one easy way to boost your after-tax returns.