Understanding Capital Gains
A capital gain occurs when you sell an asset for more than your original purchase price (known as your basis). If you sell the asset for less than what you paid, you incur a capital loss. These losses can be used to offset gains and lower your overall tax bill.
Types of Capital Gains
- Short-term capital gains: These apply to assets held for one year or less and are taxed at your ordinary income tax rates, which can be as high as 37%.
- Long-term capital gains: These apply to assets held for more than one year and benefit from lower tax rates of 0%, 15%, or 20%, depending on your income level.
2025 Long-Term Capital Gains Tax Rates by Filing Status
| Filing Status | 0% Rate (up to) | 15% Rate | 20% Rate (over) |
| Single | $47,025 | $47,026 – $518,900 | $518,901+ |
| Married Filing Jointly | $94,050 | $94,051 – $583,750 | $583,751+ |
| Head of Household | $63,000 | $63,001 – $551,350 | $551,351+ |
(These thresholds are adjusted annually for inflation.)
Key Strategies to Reduce Capital Gains Taxes
You can reduce or even avoid capital gains taxes through several methods:
- Primary Residence Exclusion — Exclude gains from the sale of your main home under certain conditions.
- Capital Losses — Use losses to offset gains or deduct up to $3,000 of losses against other income.
- Opportunity Zones — Invest gains in designated areas for tax deferral and potential exclusion.
- Retirement Accounts — Assets held in IRAs or 401(k)s grow tax-deferred or tax-free.
- Gifting Appreciated Assets — Transfer assets to family members in lower tax brackets.
- 1031 Exchange — Defer gains by exchanging investment property for a like-kind property.
- Installment Sales — Spread capital gains tax liability over several years by receiving payments in installments.