Are Capital Gains Taxed Twice? Here’s How It Can Happen

The question of whether capital gains are taxed twice is a common point of confusion, as the answer depends on the specific investment and the entities involved. A capital gain is the profit realized from selling an asset, such as stocks or real estate, for a price higher than its original purchase price, or cost basis.

In some situations, the same profit can be subject to tax multiple times. This can happen by different levels of government or because of how the underlying profit was generated before reaching the investor. This complexity arises from the interaction between corporate, individual, federal, and state tax laws.

The Primary Federal Capital Gains Tax

The most direct tax on a capital gain is levied by the federal government, calculated on the difference between an asset’s selling price and its cost basis. The basis is what an investor paid for the asset, including any commissions or fees. The tax treatment depends on how long the asset was held.

Gains from assets held for one year or less are classified as short-term capital gains. These are taxed at the same rates as an individual’s ordinary income, which for 2025 range from 10% to 37%, depending on total taxable income.

Gains from assets held for more than one year are considered long-term capital gains and are taxed at lower, preferential rates. For the 2025 tax year, these rates are 0%, 15%, or 20%. An individual filer with a total taxable income of $48,350 or less would pay 0% on their long-term gains, while the 15% rate applies to incomes between $48,351 and $533,400 for single filers, and the 20% rate applies to incomes above that threshold. These brackets are adjusted for inflation annually.

Corporate Profits and Shareholder Gains

A primary example of double taxation involves investments in C-corporations. This structure creates two distinct taxable events on the same corporate profit. First, when a C-corporation earns a profit from its operations, it must pay federal corporate income tax on those earnings at a flat 21% rate.

After the corporation pays this tax, the remaining profits, known as retained earnings, increase the company’s net worth, which is often reflected in a higher stock price. When a shareholder sells their shares of that company for a profit, they realize a capital gain. This gain is then subject to a second tax at the shareholder’s personal level, who must pay the applicable long-term or short-term capital gains tax.

For example, a C-corporation earns $1 million in profit and pays $210,000 in corporate income tax. This leaves $790,000 in after-tax profit, causing the company’s stock price to rise. If an investor sells their shares, the profit they make is a capital gain, and they will owe personal capital gains tax, representing the second time the original corporate earnings have been taxed.

Taxation by Multiple Government Levels

A capital gain can be taxed twice when different government jurisdictions levy a tax on the same event. When an individual realizes a capital gain, it is subject to federal tax, and most states also impose their own income tax on that same gain.

The treatment of capital gains at the state level varies. Most states with an income tax treat capital gains as regular income, taxing them at the state’s standard income tax rates. These rates can be structured as a flat tax, where one rate applies to all income levels, or a progressive system with multiple brackets.

However, not all states impose an income tax. As of 2025, the following states do not have a broad-based personal income tax:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Residents of these states would generally only be subject to the federal capital gains tax. Washington, however, does impose a 7% tax on long-term capital gains that exceed a certain threshold, with a higher rate applied to gains over $1 million.

Additional Federal Taxes on Investment Income

Beyond the primary federal capital gains tax, certain higher-income individuals may be subject to an additional federal tax on their investment profits, known as the Net Investment Income Tax (NIIT). The NIIT was enacted as part of the Health Care and Education Reconciliation Act of 2010 and applies a 3.8% tax on certain investment income for taxpayers whose income exceeds specific thresholds.

The NIIT is calculated on the lesser of the taxpayer’s net investment income or the excess of their Modified Adjusted Gross Income (MAGI) over the threshold. The MAGI thresholds are not indexed for inflation and are set at $200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately. Net investment income includes capital gains, dividends, and interest.

This means a high-income investor could face multiple federal taxes on the same capital gain. For example, a single filer with a MAGI of $600,000 would pay the 20% long-term capital gains tax and also owe the 3.8% NIIT on that same gain, bringing their total federal tax rate to 23.8%.

Pass-Through Entities and Tax Treatment

The double taxation seen with C-corporations is not universal. Many businesses are organized as pass-through entities to avoid this two-tiered tax system, including S-corporations, partnerships, and Limited Liability Companies (LLCs). These entities do not pay income tax at the business level.

Instead, the profits and losses are “passed through” directly to the owners’ personal tax returns. Each owner reports their share of the business’s income on their individual return and pays tax at their personal income tax rate. For example, if a partnership with two equal partners earns $200,000 in profit, each partner would report $100,000 of income on their personal return and pay the corresponding tax.

The partnership itself files an informational return but pays no tax. By eliminating the entity-level tax, pass-through structures ensure that business profits are taxed only once, when they reach the owner.