Updated for tax year 2025. If you invest in stocks, funds, real estate, crypto, or a small business, you’ve probably heard the term “capital gains.” This long-form guide offers capital gains tax explained in plain English, demystifies the 2025 capital gains tax rates, and digs into rules, examples, and planning strategies you can use before year-end. Think of it as your comprehensive reference: capital gains tax demystified for busy investors and business owners.
What Is Capital Gains Tax?
Capital gains tax is the tax you pay when you sell a capital asset for more than your cost basis. Capital assets include stocks, bonds, ETFs, mutual funds, real estate, cryptocurrency, collectibles, and business interests. Gains are generally categorized as either short-term (held one year or less) or long-term (held more than one year), and that distinction drives the rate you pay.
At its core, the formula is straightforward: Sales proceeds − Adjusted cost basis = Capital gain (or loss). What gets complex is everything that feeds “adjusted cost basis” and the variety of special rules that apply across asset types. This guide offers capital gains tax explained in detail, with plenty of examples and practical tips.
2025 Federal Capital Gains Tax Rates at a Glance
For 2025, the United States maintains the familiar three-tier structure for long-term capital gains (LTCG) and qualified dividends: 0%, 15%, and 20%. In addition, some taxpayers may owe the 3.8% Net Investment Income Tax (NIIT). Short-term capital gains (STCG) are taxed at ordinary income rates.
Short-Term vs. Long-Term
- Short-term capital gains: Assets held for one year or less are taxed at your ordinary income rates (the same brackets that apply to wages and interest). The top marginal rate remains 37% for 2025, with inflation-adjusted thresholds.
- Long-term capital gains: Assets held for more than one year are taxed at preferential rates: 0%, 15%, or 20%, depending on taxable income and filing status.
How the 0% / 15% / 20% Bands Work (2025)
Important: The breakpoints for the 0%, 15%, and 20% long-term capital gains brackets are indexed for inflation. The IRS publishes the final thresholds annually in a revenue procedure. For 2025, you can expect modest increases over 2024. Here’s the structure to use when planning:
- 0% LTCG rate: Applies up to a taxable-income threshold that varies by filing status. Many retirees and modest-income investors can deliberately realize gains in this band.
- 15% LTCG rate: Applies over the 0% threshold up to a higher breakpoint; most middle- and upper-middle-income investors fall here.
- 20% LTCG rate: Applies above the top breakpoint. High earners may also face the 3.8% NIIT on top of this.
Because these thresholds interact with other income, it’s wise to model your 2025 taxable income before executing big sales. A tax pro or planning software can show you how an extra dollar of gain moves you across brackets.
Special Long-Term Rates
- Collectibles: Long-term gains on collectibles (art, coins, precious metals, certain NFTs whose underlying asset is a collectible) can be taxed at a maximum 28% federal rate, plus NIIT where applicable.
- Unrecaptured Section 1250 Gain (Real Estate Depreciation Recapture): Long-term gains attributable to prior depreciation on real property are taxed at a maximum 25% rate.
Net Investment Income Tax (NIIT)
Above certain modified adjusted gross income (MAGI) thresholds—$200,000 single/HOH, $250,000 MFJ, $125,000 MFS—you may owe an additional 3.8% NIIT on the lesser of your net investment income or the amount your MAGI exceeds the threshold. NIIT can apply to capital gains, dividends, interest, rental income, and passive business income. These NIIT thresholds are not indexed for inflation, so more households gradually fall in each year.
Short-Term Capital Gains: 2025 Ordinary Rates Still Rule
When you sell an asset held for a year or less, the gain is treated as ordinary income. For 2025, the ordinary brackets continue at seven rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37% with