What is capital gains tax in simple terms? A guide to 2024 rates, long-term vs. short-term
Tax season can feel like a minefield for new and old filers alike. Whether you work with a professional or file on your own, landing on the exact number amount you owe Uncle Sam (and vice versa) requires tireless calculation.
An important part of this calculus is the capital gains tax – a government levy on profits reaped from investments. It applies to everything from your stock portfolio to your jewelry drawer.
Here's what you should know about the capital gains tax, including the 2024 rates and the difference between short-term and long-term profits.
What is capital gains tax?
Let's start at the beginning. What are capital gains? They refer to any profit you make from buying an asset at one price and selling it off at a higher price.
All capital gains, like other profits, are subject to taxes. But there are caveats. For example, if you have a stock with a share price of $100 and it rises to $200 — that is a 'capital gain' but not one that you will be taxed on unless you 'close your position,' meaning you sell that stock for the cash value.
Once you sell the stock and realize the actual capital gain (in this case $100) you can be taxed on that difference.
Long-term capital gains vs. short-term
A short-term capital gains tax is levied on the profits of investments that were sold after being held for a year or less. They are taxed at the same rate as your income. The IRS's tax brackets determine the tax you pay for each portion of your income.
Long-term capital gains tax is applied to investments that have been held for over a year before they were sold for a profit. Long-term capital gains are generally taxed at a lower rate. For the 2024 tax year, the highest possible rate is 20%.
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What qualifies for capital gains tax?
Capital gains taxes are not exclusive to the stock market. Anything considered a "capital asset" is subject to the tax. Essentially, any investment made that could appreciate and create a profit is fair play.
Capital gains tax applies to:
- real estate
- bonds
- mutual funds
- NFTs/cryptocurrency
- jewelry/coin collections
What is the 2024 capital gains tax rate?
The amount that you will be taxed on capital gains depends on how long you have held a certain capital asset (long-term vs. short-term) and your income (what tax bracket you fall in.)
For short-term gains, you can follow the regular guide for income tax to see how much you will pay for profits.
The long-term capital gains tax rates for both the 2023 and 2024 tax years are 0%, 15%, or 20%. The higher your income, the more you will have to pay in capital gains taxes.
The rate is 0% for:
- Unmarried individuals filing separately with a taxable income less than or equal to $47,025
- Married filing jointly with a taxable income less than or equal to $94,050
- Head of household with a taxable income less than or equal to $63,000
The rate is 15% for:
- Unmarried individuals filing with a taxable income between $47,025 and $518,900
- Married filing separately with a taxable income between $94,050 and $583,750
- Head of household with a taxable income between $63,000 and $551,350
The rate is 20% for
- Anyone whose taxable income is above the 15% threshold in their category
Contributing: Olivia Munson