Direct answer: Long-term capital gains (assets held more than one year) are taxed at 0%, 15%, or 20% depending on taxable income. Short-term capital gains are taxed as ordinary income at the taxpayer's marginal rate (up to 37%). High earners may also owe the 3.8% Net Investment Income Tax on investment income including capital gains. The most significant recent change: the Tax Cuts and Jobs Act (2017) decoupled long-term capital gains brackets from ordinary income brackets and set them to specific dollar thresholds that now adjust for inflation.
What Changed: Capital Gains Tax Rates
Key Takeaways
- For 2024: the 0% long-term capital gains rate applies to taxable income up to $47,025 (single) or $94,050 (married filing jointly); the 15% rate applies up to $518,900 (single) or $583,750 (MFJ); the 20% rate applies above those thresholds.
- Short-term capital gains (assets held 1 year or less) are taxed as ordinary income; the top rate is 37% for income above $609,350 (single) or $731,200 (MFJ) in 2024.
- The 3.8% Net Investment Income Tax applies to the lesser of net investment income or the amount by which MAGI exceeds $200,000 (single) or $250,000 (MFJ); these thresholds are NOT inflation-adjusted and have not changed since the NIIT was enacted in 2013.
- Tax-loss harvesting (selling depreciated securities to realize losses that offset gains) is more valuable for short-term gains (high marginal rate savings) than for long-term gains at 0% or 15%.
- The 'wash-sale rule' prohibits claiming a loss on a security if you repurchase the same or substantially identical security within 30 days before or after the sale.
2024 Long-Term Capital Gains Rate Thresholds
For 2024, the three long-term capital gains rates apply to taxable income (after deductions), not MAGI: 0% for single filers with taxable income up to $47,025 and married filing jointly up to $94,050; 15% for single filers between $47,025 and $518,900 and MFJ between $94,050 and $583,750; and 20% for single filers above $518,900 and MFJ above $583,750. These thresholds are adjusted annually for inflation. Note: taxable income, not gross income, determines the rate; the standard deduction reduces taxable income below gross income, which is why many middle-income households pay 0% on long-term capital gains even with moderate investment income.
Short-Term Capital Gains: Ordinary Income Treatment
Short-term gains are fully taxable at ordinary income rates. The difference in tax rate between short-term and long-term treatment can be 20 to 25 percentage points for high-income investors (37% short-term vs. 20% + 3.8% NIIT = 23.8% long-term). This difference is the mathematical basis for the investment strategy of holding assets for longer than one year when practical. For investors in the 15% long-term bracket, the difference is still significant: 24% to 32% ordinary income rates vs. 15% long-term.
The Net Investment Income Tax
The 3.8% NIIT was enacted as part of the Affordable Care Act in 2013 and applies to net investment income (interest, dividends, capital gains, rental income, passive business income) for taxpayers above the MAGI thresholds. These thresholds have not been adjusted for inflation since 2013: $200,000 for single filers, $250,000 for married filing jointly. The NIIT applies to the lesser of: net investment income for the year, or the amount by which MAGI exceeds the threshold. Combined with the 20% capital gains rate, the maximum federal capital gains rate for high earners is 23.8%.
State Capital Gains Tax Treatment
Most states tax capital gains as ordinary income at state income tax rates, which range from 0% (no income tax states: Florida, Texas, Nevada, Washington, others) to 13.3% (California's top rate, which applies to all capital gains). Some states provide preferential treatment for long-term gains; check your state's treatment. The combined federal plus state capital gains rate for a California resident in the top bracket is approximately 37% (23.8% federal including NIIT plus 13.3% California), making tax-loss harvesting and asset location particularly valuable in high-tax states.
Frequently Asked Questions
Does a Roth IRA conversion affect capital gains rates?
A Roth conversion adds to ordinary income in the conversion year, potentially pushing capital gains into a higher bracket. If a taxpayer has long-term capital gains that would otherwise be at 0% or 15%, a large Roth conversion in the same year could push taxable income above the long-term rate thresholds, increasing the capital gains rate. Tax planning around Roth conversions should consider the interaction with capital gains rates.
How does the wash-sale rule interact with tax-loss harvesting?
The wash-sale rule disallows a loss if you buy a substantially identical security within 30 days before or after the sale. For tax-loss harvesting on a broad index ETF, the standard technique is to sell the ETF and immediately buy a similar but not substantially identical ETF (e.g., sell Vanguard Total Market ETF and buy Schwab Total Market ETF) to maintain market exposure without triggering a wash sale. Individual stocks are typically not substantially identical to other individual stocks; selling one company's stock and buying a different company does not trigger a wash sale.
Are there proposals to change capital gains taxation?
Capital gains tax rates are subject to legislative change and have been modified multiple times over the past 40 years. As of 2024, there is no enacted change to the rates described here, but legislative proposals periodically include changes to capital gains rates or the step-up in basis at death. Check current tax news sources (IRS.gov, tax professional publications) for any legislation affecting the current year.