Capital Gains Tax: 2023-2024 Tax Rates

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Vault’s Viewpoint

• You may owe capital gains tax if you make a profit on the sale of an investment, property or asset.
• Short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed at various percentages based on total taxable income.
• There are many ways to avoid or minimize capital gains tax, including tax-loss harvesting and investing in tax-advantaged accounts like 401(k)s and IRAs.

What Are Capital Gains?

Capital gains are the earnings you make when you sell an asset or investment. For example, if you sell a stock or mutual fund for a higher price than you bought it, you’ve earned capital gains on your investment. 

Stocks and bonds aren’t the only investments that can earn capital gains. If you sell a house, car, boat or other form of property for a profit, you may need to pay capital gains tax on the money you earned.

If you sell an investment for less money than you paid for it, your deficit is considered a capital loss. In some cases, you may be able to deduct your capital losses on your taxes.

What Is Capital Gains Tax and How Does It Work?

Capital gains tax works in two ways. If you sell an asset within a year of purchasing it, your capital gains are taxed as ordinary income. If you sell an asset you’ve held for longer than a year, the tax you owe is determined by a long-term capital gains tax table. Depending on your income, you may end up paying $0 on your long-term capital gains — or you may pay capital gains tax at a 15 or 20 percent tax rate.

Types of Capital Gains Tax

There are two types of capital gains tax: long-term capital gains tax and short-term capital gains tax. These two types of capital gains are taxed at different rates, so here’s what you need to know.

Long-Term Capital Gains Tax

Long-term capital gains tax is applied to the profit of any sale in which you held the investment, property or asset for longer than a year. The long-term capital gains tax rate is partially dependent on your total taxable income, and the percentage of tax you owe on long-term capital gains increases as your taxable income goes up. 

Many people will pay less money in long-term capital gains tax than they would have if they’d made the same profit within a single year. So it may be to your financial benefit to hold an investment or asset for at least a year to ensure your capital gains are taxed at the long-term capital gains tax rate instead of the short-term rate.

Short-Term Capital Gains Tax

Short-term capital gains tax is applied to the profit of any sale in which you held the investment, property or asset for one year or less. Short-term capital gains are taxed at the ordinary income rate — which means that in 2023 and 2024, your short-term capital gains will be counted as part of your total taxable income and taxed in one of the following brackets: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.

Capital Gains Tax Rates 2023-2024 

Capital gains tax rates depend on how long you’ve held your investment before selling. If you’ve held your investment, asset or property for one year or less before selling it, your capital gains are considered short-term and taxed as ordinary income. If you’ve held your investment for longer than a year, your capital gains are considered long-term and taxed at varying rates based on your total taxable income.

Here are tables outlining the 2023 and 2024 capital gains tax rates. Keep in mind that the numbers reflect total taxable income, not the money you’ve earned from your capital gains. 

2023 Long-Term Capital Gains Tax Rates

2024 Long-Term Capital Gains Tax Rates

Capital Gains Tax Rules and Regulations

If you are interested in learning more about capital gains tax, you can read IRS Topic No. 409, Capital Gains and Losses. That said, the most important capital gains rule to be aware of is to always report your capital gains on your taxes. Many investment brokerages send you a summary of your capital gains at the end of each tax year, and most tax prep software programs make it easy to transfer the information on those forms directly into your tax return. Some people prefer to work with a CPA or tax professional, who can also help you navigate the capital gains tax rules and regulations.

How To Minimize or Avoid Capital Gains Tax

If you want to minimize or avoid capital gains tax, you have a few options. Holding all of your investments for at least a year before selling them is one of the best ways to minimize capital gains tax. Since short-term capital gains are taxed as ordinary income, holding your investments until you qualify for the long-term capital gains tax rate could save you money.

Some people practice tax-loss harvesting, which involves selling investments at a loss to balance out the income earned through capital gains. Since capital losses can be tax deductible, people who choose to sell their lowest-performing investments and replace them with better-performing investments could get both a tax break and a stronger portfolio.

You may also be able to avoid capital gains tax if you keep your taxable income within the 0% long-term capital gains threshold. This is especially important for retirees, who may be selling investments they’ve held for decades. But if your income is low enough, you might not be taxed on your long-term capital gains.

You can also minimize your capital gains tax by investing in tax-advantaged accounts where capital gains on investments are not taxed as long as the money remains inside this type of account. These accounts include IRAs, 401(k)s, HSAs, 529 Plans and other popular savings vehicles. 

Many people also work with trained tax and financial advisors who understand tax law, investments, real estate and other types of property. These people could end up being extremely valuable financial planning assets.