FAQs About Capital Gains and Taxes Answered

Understanding capital gains taxes can be complex, so here are answers to the most common questions about them:

1. What are capital gains?

Capital gains are the profits earned when you sell an asset, such as stocks, bonds, real estate, or collectibles, for more than its purchase price. These gains are taxable and classified as either Short-Term vs. Long-Term Capital Gains, depending on how long you held the asset before selling it.

2. What’s the difference between short-term and long-term capital gains?

Short-Term Capital Gains: Profits from selling assets held for 1 year or less. Taxed at ordinary income tax rates (10% to 37%).
Long-Term Capital Gains: Profits from selling assets held for more than 1 year. Taxed at lower rates (0%, 15%, or 20%, depending on your taxable income).

3. What is the capital gains tax rate for 2025?

Short-Term Gains: Taxed as ordinary income at rates ranging from 10% to 37%, depending on your income.
Long-Term Gains: Taxed at preferential rates:
- 0%: Income up to $44,625 (single) or $89,250 (married filing jointly).
- 15%: Income between $44,626 and $492,300 (single) or $89,251 and $553,850 (married filing jointly).
- 20%: Income above $492,300 (single) or $553,850 (married filing jointly).

4. Are capital gains taxed in retirement accounts?

No. Investments in tax-advantaged accounts like 401(k)s and IRAs grow tax-deferred (traditional accounts) or tax-free (Roth accounts). You pay taxes when you withdraw funds in retirement (traditional accounts) or not at all (Roth accounts, for qualified withdrawals).

5. How can I avoid paying capital gains taxes?

Hold investments for more than a year to qualify for lower long-term rates.
Offset gains with losses through tax-loss harvesting.
Invest in tax-advantaged accounts (401(k), IRA, HSA).
Use the primary residence exclusion if selling your home.
Gift or donate appreciated assets to reduce taxable gains.

6. What is the primary residence capital gains exclusion?

If you sell your primary residence, you can exclude up to:

$250,000 (single filers) or
$500,000 (married filing jointly) of capital gains from taxation.
To qualify, you must have owned and lived in the home for at least 2 of the last 5 years.

7. What is the Net Investment Income Tax (NIIT)?

The NIIT is a 3.8% surtax applied to net investment income, including capital gains, for individuals with modified adjusted gross income (MAGI) above:

$200,000 for single filers.
$250,000 for married filing jointly.

8. How do I report capital gains on my taxes?

Use Form 8949 to report the details of each transaction, including asset type, purchase/sale date, cost basis, and sale price.
Summarize gains and losses on Schedule D (Form 1040) to calculate your total taxable capital gains or deductible losses.

9. Can I deduct capital losses?

Yes. You can use losses to offset gains and reduce taxable income:

Deduct losses against gains of the same type (short-term with short-term, long-term with long-term).
Deduct up to $3,000 of net losses annually against ordinary income.
Carry forward any unused losses to future tax years.

10. What happens if I inherit assets?

Inherited assets receive a step-up in cost basis to their market value at the date of the original owner’s death.
If you sell the asset, you’re taxed only on the appreciation since the date of inheritance, not the original purchase price.

11. Are gifts of appreciated assets subject to capital gains tax?

When you gift appreciated assets, the recipient assumes your cost basis.
They will owe capital gains tax if they sell the asset, based on the difference between the original cost basis and the sale price.
No capital gains tax is due at the time of the gift, but the gift may be subject to gift tax if it exceeds the annual exclusion limit ($17,000 per recipient in 2025).

12. Do capital gains taxes apply to cryptocurrency?

Yes. Cryptocurrencies are considered property by the IRS, and gains from selling or trading them are taxable as capital gains. The same short-term and long-term rules apply depending on the holding period.

13. Are there special rules for real estate investments?

1031 Exchange: Defer capital gains taxes on investment property sales by reinvesting the proceeds into a “like-kind” property.
Depreciation Recapture: When selling rental property, the IRS taxes the depreciation deductions you claimed as ordinary income, in addition to capital gains on the appreciation.

14. How are dividends different from capital gains?

Capital Gains: Profits from selling an investment for more than its purchase price.
Dividends: Payments made to shareholders from a company’s earnings.
- Qualified Dividends: Taxed at long-term capital gains rates.
- Ordinary Dividends: Taxed at ordinary income rates.

15. Can I defer capital gains tax?

Yes. You can defer taxes by:

Investing in a Qualified Opportunity Fund (QOF).
Using a 1031 exchange for real estate.
Reinvesting proceeds into tax-advantaged accounts, such as an IRA.

16. What records should I keep for capital gains?

Keep detailed records of:
- Purchase price (cost basis).
- Sale price.
- Dates of purchase and sale.
- Improvements made to real estate (for cost basis adjustments).
Maintain records for at least 3 years, but longer for major assets like real estate.

17. What is the wash-sale rule?

If you sell a security at a loss and buy the same or a substantially similar security within 30 days before or after the sale, the loss is disallowed for tax purposes. However, the disallowed loss is added to the cost basis of the new security.

18. Are there capital gains taxes at the state level?

Yes, many states tax capital gains as part of state income tax, while others, like Texas and Florida, do not have a state income tax. The rates and rules vary by state, so check your local regulations.

19. What are the risks of frequent trading?

Frequent trading triggers short-term capital gains, which are taxed at higher rates. It can also:

Increase transaction costs.
Lead to higher tax bills.
Make it harder to build long-term wealth due to lower after-tax returns.

20. What happens if I fail to report capital gains?

Failing to report capital gains can lead to:

IRS penalties and interest on unpaid taxes.
Potential audits.
Difficulty reconciling future tax returns if discrepancies are found.

Managing your capital gains effectively can save you money and help grow your investments. If you have more questions or need help with specific scenarios, let me know!

FAQs About Capital Gains and Taxes Answered