What Is a Capital Gain and How Is It Taxed?
Understand the tax rules for profits from selling assets. This guide explains how the length of ownership and original cost are used to determine your tax liability.
A capital gain is the profit earned when you sell an asset for a price higher than its original purchase price. This concept applies to various assets, from stocks and bonds to real estate and collectibles. The tax implications of a capital gain depend on the type of asset, how long you owned it, and your overall income level.
Identifying Capital Assets
For tax purposes, nearly everything you own for personal use or investment is a capital asset. This includes your home, furniture, car, stocks, bonds, and collectibles. However, some property is not a capital asset, such as business inventory, accounts receivable acquired in business, or creative works like copyrights held by their creator. Income from selling these non-capital assets is treated as ordinary income, while selling a capital asset results in a capital gain or loss.
Calculating the Gain or Loss
To determine a capital gain or loss, you must first establish the asset’s basis. The basis is the original cost you paid for the asset, including any commissions or fees associated with the purchase. For example, if you bought 100 shares of stock for $10 per share and paid a $10 commission, your initial basis would be $1,010.
The basis is not static and can be adjusted over time, resulting in an “adjusted basis.” For real estate, this includes the cost of significant improvements, such as adding a room. For stocks and mutual funds, reinvested dividends increase your basis. Failing to account for these adjustments can lead to overstating your capital gain and paying more tax than necessary.
The final step is to subtract the adjusted basis from the sale proceeds, which is the amount you received from the sale minus any selling expenses. The formula is: Sale Proceeds – Adjusted Basis = Capital Gain or Loss. If the result is positive, you have a capital gain; if negative, you have a capital loss, which may be deductible.
Short-Term vs Long-Term Gains
The holding period, or the length of time you own an asset, determines whether a capital gain is short-term or long-term. A gain from an asset held for one year or less is a short-term capital gain. Conversely, a gain from an asset owned for more than one year is a long-term capital gain. This distinction is important because long-term gains receive more favorable tax treatment.
Tax Treatment of Capital Gains
Short-term capital gains do not receive preferential tax treatment and are taxed at your ordinary income tax rates. For the 2025 tax year, these rates range from 10% to 37%, depending on your taxable income and filing status. This means a profit from an asset held for a short period is taxed at the same rate as your wages.
Long-term capital gains are taxed at lower rates of 0%, 15%, or 20%, depending on your taxable income and filing status. For the 2025 tax year, the 0% rate applies to taxable income up to $48,350 for single filers and up to $96,700 for married couples filing jointly. The 20% rate applies to income over $533,400 for single filers and over $600,050 for joint filers. Taxpayers with income between these levels fall into the 15% bracket.
Higher-income taxpayers may also be subject to an additional 3.8% Net Investment Income Tax (NIIT). This tax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds certain thresholds. For 2025, these thresholds are $200,000 for single filers and $250,000 for those married filing jointly. The NIIT is levied on top of the regular capital gains tax.
Reporting to the IRS
When you sell a capital asset, the transaction must be reported to the IRS on your tax return. You will likely receive Form 1099-B from your broker, which details the proceeds from your sales transactions. This form provides much of the necessary information for your tax filing.
You will use the information from Form 1099-B to complete Form 8949, Sales and Other Dispositions of Capital Assets. On this form, you list the details of each transaction, including the asset description, the dates you acquired and sold it, the sales price, and your cost basis. Form 8949 separates short-term from long-term transactions.
The totals from Form 8949 are then transferred to Schedule D, Capital Gains and Losses. Schedule D summarizes your total short-term and long-term gains and losses, calculating the net figure that will be reported on your Form 1040. This final number determines your tax liability or deductible loss.