The maximum federal capital gains tax rate in 2024 is 20%, applied to long-term gains on assets held over one year. This rate applies only to taxpayers in the highest income brackets. A 3.8% net investment income tax may increase the effective rate to 23.8% for high-income earners.
Capital gains taxes apply when you sell an asset for more than you paid for it. The rate depends on how long you held the asset and your taxable income. Long-term gains-on assets held over 12 months-are taxed at lower rates than short-term gains, which are treated as ordinary income.
The IRS defines three federal capital gains tax brackets: 0%, 15%, and 20%. The 20% rate applies to single filers earning $445,850 or more and married couples filing jointly earning $492,300 or more in 2024. These thresholds are adjusted annually for inflation.
For most taxpayers, the capital gains tax rate is determined by their modified adjusted gross income (MAGI). The IRS uses MAGI to assign you to a bracket. If your income falls below the threshold for the 20% rate, you pay less-either 15% or 0%.
For example, a single filer with $500,000 in taxable income and $100,000 in long-term capital gains pays 20% on the gains. That's $20,000 in federal capital gains tax. But if the same person earned $300,000, they'd pay 15%-$15,000-on the gains.
A non-obvious detail: the 0% rate applies only to those whose taxable income falls below $47,025 for single filers and $87,050 for married couples filing jointly in 2024. This means low- and middle-income earners can sell investments without paying federal capital gains tax, even if they make significant profits.
Short-term capital gains-on assets held less than one year-are taxed at your ordinary income tax rate. For a taxpayer in the 37% marginal bracket, this means a 37% tax on gains. This is higher than the 20% long-term rate.
Consider a trader who bought Apple stock for $10,000 and sold it for $15,000 after nine months. Their $5,000 gain is short-term. If they're in the 37% tax bracket, they owe $1,850 in federal taxes-not $1,000 under the 20% long-term rate.
Long-term gains are eligible for preferential treatment because Congress intended them to encourage long-term investing. The IRS requires holding periods to be at least 12 months and one day. Gains from assets held less than that period are taxed as ordinary income.
Federal capital gains tax is not the only cost. State taxes apply in 37 states and Washington D.C., adding to the total burden. Some states, like California and New York, impose rates up to 13.3% on capital gains.
For example, a New York resident earning $500,000 in taxable income and realizing $100,000 in long-term gains pays 20% federal tax ($20,000) and 8.82% state tax ($8,820)-for a total of $28,820. The combined rate is 28.82%.
States with no capital gains tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Residents in these states avoid state-level capital gains taxes entirely.
| Income Level (Single) | Long-Term Capital Gains Rate | Short-Term Rate |
|---|---|---|
| Under $47,025 | 0% | 10%-12% |
| $47,026-$518,900 | 15% | 22%-32% |
| Over $518,900 | 20% | 37% |
Source: IRS Publication 544 (2024), U.S. Department of the Treasury, Office of Tax Policy.
An additional 3.8% tax applies to net investment income for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). This includes capital gains, dividends, and rental income.
If a single filer earns $500,000 and has $100,000 in long-term capital gains, they pay 20% federal capital gains tax ($20,000) and 3.8% NIIT on the gains ($3,800). Total federal tax: $23,800.
This tax is often overlooked. It doesn't apply to all gains-it's calculated on the lesser of net investment income or the amount by which MAGI exceeds the threshold. For example, a filer with $210,000 MAGI and $50,000 in gains owes NIIT on $50,000.
Many assume the max capital gains tax is 20% across the board. That's incorrect. The 20% rate applies only to the highest earners. Most Americans pay 0% or 15%.
Another mistake: thinking capital gains tax applies to all sales. It does not. Losses can offset gains. If you sell a stock for $10,000 after buying it for $12,000, you have a $2,000 loss. You can use that to reduce taxable gains elsewhere.
I once advised a client who sold a rental property for $300,000 after owning it for 18 years. They had $100,000 in depreciation recapture and $200,000 in capital gains. The IRS required them to pay 25% on the recaptured depreciation and 20% on the gains. Without proper planning, they owed $70,000 in federal taxes. Using a 1031 exchange, they deferred the tax entirely.
The max capital gains tax is not a flat rate. It's tiered, influenced by income, asset type, and location. Understanding the structure prevents costly surprises during tax season.