When you sell an investment, real estate, or another capital asset for more than you paid for it, the profit is called a capital gain. That gain may be taxed differently depending on how long you owned the asset and how much taxable income you have for the year.
Short-Term vs. Long-Term Gains
The first question is whether the gain is short-term or long-term. If you owned the asset for one year or less, the gain is generally short-term and taxed at ordinary income tax rates. If you owned it for more than one year, the gain is generally long-term and may qualify for lower capital gains tax rates.
This distinction matters because long-term gains usually get more favorable treatment than wages, interest, and other ordinary income. For many investors, simply holding an investment a little longer can change the tax outcome significantly.
How Taxable Income Affects the Rate
Long-term capital gains are not taxed based on gross income or adjusted gross income alone. Instead, the IRS uses taxable income, which is generally AGI minus deductions, to determine whether the gain is taxed at 0%, 15%, or 20%.
That means two people with the same AGI can still owe different capital gains taxes if one has larger deductions and therefore lower taxable income. In practice, taxable income is the number that matters most for the long-term capital gains brackets.
Federal Long-Term Rates
For tax year 2025, the IRS says most net long-term capital gains are taxed at no more than 15% for most individuals. A 0% rate applies to taxpayers with taxable income at or below these levels: $48,350 for single filers, $96,700 for married filing jointly and qualifying surviving spouse, and $64,750 for head of household. Above those levels, the 15% rate applies until the upper threshold is reached, and gains above that threshold are generally taxed at 20%.
There are also some special cases. Certain collectibles are taxed at a maximum 28% rate, unrecaptured Section 1250 gain can be taxed at up to 25%, and qualified small business stock can have its own special rules.
Where AGI Fits In
Adjusted gross income still matters, but mostly as a starting point. AGI is reduced by deductions to arrive at taxable income, and taxable income is what determines the long-term capital gains bracket. So AGI influences your rate indirectly, but it is not the final number used to set the capital gains tax rate.
This is why tax planning often focuses on more than just investment returns. Deductions, retirement contributions, charitable giving, and the timing of other income can all affect the taxable income used for capital gains calculations.
Another Tax To Watch
Higher-income taxpayers may also owe the 3.8% net investment income tax, or NIIT. For individuals, this tax generally applies when modified adjusted gross income exceeds $250,000 for married filing jointly, $125,000 for married filing separately, or $200,000 for single or head of household.
In other words, capital gains may be subject to both the regular capital gains rate and, in some cases, the additional NIIT. That can make the total tax on investment sales higher than many people expect.
A Simple Example
Suppose an investor has AGI of $100,000 and enough deductions to bring taxable income down to $85,000. The capital gains rate is not based on the $100,000 AGI figure; it is based on the $85,000 taxable income figure. That difference can change whether the gain is taxed at 0%, 15%, or another rate.
Planning Around Capital Gains
Capital gains tax planning is often about timing. In some years, it may make sense to realize gains while income is lower so the gain falls into a lower bracket. In other years, it may be better to wait, especially if doing so helps preserve a lower tax rate or avoid the NIIT.
For investors, the key takeaway is simple: capital gains tax is based on more than just the profit from a sale. The holding period, taxable income, deductions, and other investment income all play a role.