Capital gains count as taxable income and can affect your tax bracket, deductions and rates. They are taxed as short-term or long-term gains depending on how long you owned the asset and your total income. Short-term gains are taxed at regular income rates, while long-term gains often have lower rates. A financial advisor can help you plan sales and use strategies to lower taxes while keeping your investments on track.
What Exactly Are Capital Gains?
For example, if you buy company stock for $1,000 but pay $100 in trading fees, your basis is $900. Selling it for $1,500 would result in a $600 capital gain. On the other hand, you realize a capital loss if you sell assets for less than your basis.
You must record these gains and losses and report them to the IRS using Form 8949 and Schedule D.
Do Capital Gains Count as Income?
Capital gains do count as income and are a part of your adjusted gross income (AGI). The tax rate depends on the type of capital gains:
- Short‑term gains apply to assets sold within one year of purchase. They use ordinary income tax, applying standard federal brackets ranging from 10% to 37%.
- Long‑term gains apply to assets held over a year before they’re sold. They receive more favorable tax treatment at 0%, 15% or 20% rates, depending on your taxable income.
Capital Gains Tax Rates for 2025
These are the 2025 long-term capital gains thresholds.
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 0% | $0 – $48,350 | $0 – $96,700 | $0 – $48,350 | $0 – $64,750 |
| 15% | $48,351 – $533,400 | $96,701 – $600,050 | $48,351 – $300,000 | $64,751 – $566,700 |
| 20% | $533,401+ | $600,051+ | $300,001+ | $566,701+ |
Short-term gains are subject to ordinary income tax rates up to 37%. In addition, high-income individuals may pay a further 3.8% net investment income tax (NIIT) on net gains. This applies if AGI exceeds $200,000 (single and head of household), $250,000 (joint) and $125,000 (married filing single).
How Capital Gains Affect AGI and Other Taxes
Capital gains can affect more than just your gain-related tax liability. Since they are included in AGI, your gains can impact your eligibility for tax breaks, Medicare premiums and retirement phaseouts.
The added 3.8% NIIT often applies when capital gains push you into higher income brackets.
Reporting Capital Gains and Losses
When you sell assets like securities, your broker issues a 1099-B showing proceeds and cost basis. You must report this on Form 8949, then summarize gains/losses on Schedule D. If your losses exceed gains, you can deduct up to $3,000 against ordinary income annually and carry over the remainder.
Be careful of wash-sale rules, which disallow losses if you repurchase identical investments within 30 days.
Special Exclusions and Exceptions
Certain capital gains receive more favorable treatment under tax law. For example, say you sell your primary residence. You may exclude up to $250,000 of gain if single or up to $500,000 if married filing jointly. However, you must meet the IRS ownership and use tests.
Another exception applies to qualified small business stock (QSBS). Say you sell eligible Section 1202 stock held for more than five years. In this case, you can exclude up to $10 million in gains ($15 million for shares acquired after July 2025). However, you should keep in mind that there is a phase out, so you can get a 50% exclusion after 3 years and 75% after 4 years
Other gains may receive different, and potentially higher, tax rates. Gains on collectibles, including art or precious metals, are taxed at a rate of 28% (but at regular income tax rates if held for one year or less). Depreciation recapture on real estate is taxed at a 25% rate.
Strategies to Reduce Capital Gains Taxes
There are several effective strategies to help minimize capital gains taxes.
- You can hold assets for over a year to qualify for long-term capital gains rates of 0 to 20%. These rates are generally lower than ordinary income rates.
- You can harvest losses by selling underperforming investments to offset gains, potentially lowering your taxable income for the year.
- Utilizing tax-advantaged accounts, such as IRAs or 401(k)s, allows you to defer or avoid taxes on gains altogether.
- You could time your sales strategically. This is especially important during years with lower income. It allows you to potentially benefit from the 0% long-term capital gains rate.
Bottom Line
Capital gains do count as income and are a part of your AGI. The tax you owe depends on several factors. These include how long you held the asset, your total income and any applicable exclusions or exceptions. Make sure you understand reporting requirements, bracket thresholds and strategies to reduce your overall tax burden.
Tax Planning Tips
- A financial advisor can help you minimize your tax liability for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.
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