What Tax Is Levied on an Asset Held for 12 Months or Longer?
Profits from assets held over a year receive special tax treatment. Understand how your cost basis, income level, and the asset type interact to determine what you owe.
When an asset is sold after being held for 12 months or longer, the profit from that sale is subject to the long-term capital gains tax. This is a preferential tax applied to profits from investments, designed to be lower than the rates applied to ordinary income like wages or salaries. The tax applies to the gain, which is the difference between the asset’s selling price and its original purchase price.
Defining a Long-Term Capital Gain
A long-term capital gain has two primary components: the type of asset and how long it was owned. The tax applies to the sale of a “capital asset,” which the IRS broadly defines as almost everything owned and used for personal or investment purposes. Common examples include stocks, bonds, mutual funds, jewelry, and real estate. Conversely, assets that do not qualify include business inventory, copyrights held by the creator, and accounts receivable acquired in the ordinary course of business.
The holding period must be more than one year for the gain to be considered long-term. This period starts on the day after the asset is acquired and ends on the date it is sold. For instance, if you purchase a stock on May 1, 2023, you must sell it on or after May 2, 2024, to qualify for long-term treatment. Holding the asset for one year or less results in a short-term capital gain, taxed at higher, ordinary income tax rates.
Calculating the Amount of Your Gain or Loss
To determine the tax owed, you must first calculate the amount of the gain or loss from the sale. The basic formula is the proceeds from the sale minus the asset’s adjusted basis. The proceeds are the total amount you received from the sale, less any commissions or fees associated with the transaction.
The basis is the original cost of the asset, including any purchase fees or commissions. This initial basis is then adjusted over the life of the asset. For example, with a piece of real estate, the basis is increased by the cost of capital improvements, such as adding a new room. For a stock, the basis can be increased by reinvested dividends and can also be adjusted downward by depreciation deductions taken on a rental property.
For example, if you purchase 100 shares of a stock for $10 per share and pay a $50 commission, your initial basis is $1,050. If you reinvest $200 in dividends, your adjusted basis increases to $1,250. If you later sell all the shares for $3,000 and pay a $50 sales commission, your net proceeds are $2,950. Your long-term capital gain is $1,700, calculated by subtracting the $1,250 adjusted basis from the $2,950 in proceeds.
Long-Term Capital Gains Tax Rates
The tax rates for long-term capital gains are 0%, 15%, and 20%, and the specific rate an individual pays is determined by their total taxable income and filing status. For the 2025 tax year, the 0% rate applies to single filers with taxable income up to $47,025 and married couples filing jointly with income up to $94,050. The 15% rate covers single filers with income between $47,026 and $518,900 and joint filers with income between $94,051 and $583,750. The 20% rate applies to taxpayers with incomes exceeding those upper thresholds.
Certain types of long-term gains are subject to special, higher tax rates. A 28% tax rate applies to the sale of collectibles, such as art, antiques, stamps, and coins, regardless of the taxpayer’s income bracket. Another exception is the 25% rate for unrecaptured Section 1250 gain. This applies to the portion of a gain from selling real property that is attributable to depreciation deductions previously taken. Additionally, high-income individuals may be subject to a 3.8% Net Investment Income Tax on top of the standard capital gains rates.
How to Report Capital Gains
Individual transactions are first detailed on Form 8949, Sales and Other Dispositions of Capital Assets. For each sale, you must list a description of the asset, the date it was acquired, the date it was sold, the sales price, and the cost basis. This form separates short-term transactions from long-term transactions.
The totals from Form 8949 are then transferred to Schedule D, Capital Gains and Losses, which summarizes the totals for short-term and long-term gains and losses to calculate your net capital gain or loss. If you have a net capital gain, the amount is carried over to your main Form 1040 tax return and taxed according to the applicable rates.
If your capital losses exceed your capital gains, you have a net capital loss. You can use this loss to offset other income, up to an annual limit of $3,000 ($1,500 if married filing separately). Any loss amount that exceeds this limit is not lost; it can be carried forward to future tax years to offset capital gains or ordinary income in those years.