As one of our most famous Founding Fathers, Benjamin Franklin, once said, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”
Franklin may not have been referring to capital gains tax when he wrote this famous line, but he was certainly prescient about the certainty of taxes in our lives.
Read on for a simple breakdown of what capital gains tax is, how it works, and the current rates for the 2025 tax year.
Capital Gains Tax, Defined
In the grand scheme of taxation, capital gains tax is often considered the least detrimental when ranking different types of taxes. It is only applied to the sale of an investment, which includes capital assets such as:
- Stocks
- Bonds
- Digital assets
- Jewelry
- Collectibles
- Real estate
The capital gains tax amount depends on how long you have held the asset you’re selling. If you’ve owned the capital asset for longer than a year, it will be subject to long-term capital gains tax based on the appreciation of the asset. Your capital gains tax rate depends on your tax bracket, and the 2025 rates are 0%, 15%, and 20%. Collectibles are taxed at 28%.
Check out the detailed tax rates by taxable income bracket below.
Investopedia
However, investments owned for less than a year are subject to short-term capital gains tax. The short-term rate is based on your regular income tax rate, which is typically higher than long-term gains rates.
Minimizing Capital Gains Impact
You can simply avoid capital gains tax by avoiding the sale of a capital asset. However, this may be unavoidable or conflict with your investment view. If you have to sell, you can apply capital losses against capital gains to reduce your tax liability through a practice called tax-loss harvesting. For example, if you sell Stock A for a profit, you can also sell Stock B for a loss to offset your gain.
Selling real estate at a profit can be offset by qualifying expenses incurred in making or maintaining the investment. These expenses increase the investment’s cost basis and reduce its taxable profit. The IRS also offers an exclusion of up to $250,000 for an individual selling their primary residence or $500,000 for a married couple filing jointly.
The Bottom Line on Capital Gains
Capital gains taxes are owed on earnings made from the sale of capital assets. Depending on the holding term and your income tax bracket, the tax is calculated using the difference between the cost basis of the asset and the sale price. This difference is subject to the capital gains rate.
Are you considering selling assets, but concerned about how it will impact your taxes? We’ll gladly answer all your capital gains questions and help you optimize your investment strategy and mitigate taxes. Reach out to speak with a Carlson Investments advisor today!
Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.
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