What is capital gains tax? Here’s where you owe, and strategies to reduce your bill.

If you own something, it’s probably a big asset. Capital assets are anything you own for personal use or as an investment. It could be a couch, a car, your home, a stock, a bond, or anything else.

When you sell it, you either make money or lose money. The difference between what you paid and what you sold for could be a huge profit or loss. (That makes it easier since you may have received something as a gift and then sold it.)

Depending on how much you’ve made, how long you’ve had it, and a few other factors, you may pay tax on capital gains. On the other hand, you may be able to deduct some of your losses.

There are two types of capital gains, short term and long term.

If you own the property for one year or less, it is temporary. Anything longer than that is for a long time.

The amount of taxes you may or may not owe depends on how long you have owned the property. It’s called holding time.

To determine your holding period, count from the day after you receive the goods up to and including the day you issue them. That assumes you know the date, but if the property was a gift, inheritance, or something else, you wouldn’t know. (We’ll get into those rules in the section on adjusted basis.)

Tax rates differ for short-term and long-term capital gains. Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income. Short-term gains are taxed as ordinary income at 10%, 12%, 22%, 24%, 32%, 35% or 37%.

The takeaway for taxpayers: You’ll likely owe less taxes the longer you hold the property.

You owe taxes if you have a large capital gain. Checking it involves some math.

Take your biggest long-term profit for the year and subtract all your short-term losses for the year. The result is your greatest financial gain.

So, if you have $15,000 in long-term capital gains and $5,000 in short-term capital losses, you will owe capital gains tax on $10,000. The amount you’ll pay actually depends on your total income – more on that later.

Here is the long awaited section on a modified basis.

The basis is what you paid for something. You need that number to figure out most things, including any gains or losses when you sell.

When you buy a stock or bond, the basis is the price, plus any commissions and recording or transfer fees. If you have a stock or bond that you did not purchase, you determine its value by looking at the fair market value of the stock or bond on the date it was transferred to you. You can also use the previous owner’s modified base if you have one.

“A common mistake is neglecting to prove the expense or not reporting it properly (perhaps due to a lack of supporting documents),” said Garrett Watson, director of Policy Analysis at the Tax Foundation. “[Doing that] it may exceed the tax liability, or, in some cases, reduce it if the basis is reported as too high. Correcting these details with complete documents is important.”

Whether or not you owe taxes on your gross profit depends on your income level, so the tax rate varies depending on how much you make. When you make income, the tax rate increases on your capital gains.

These rates are for taxes due on April 15, 2026 (for properties sold in 2025).

These rates are for taxes due on April 15, 2027 (for assets sold in 2026).

Remember, you usually owe no capital gains tax if your profits are on paper. You only have to pay when the profit is realized (if you sell the goods). If you haven’t sold, the profit is not available.

Read more: Here’s how to calculate capital gains on real estate

If your capital loss exceeds your capital gain, you can use it to reduce your income. You can claim the lesser of $3,000 or your entire loss.

If your net loss exceeds that limit, you may be able to carry the loss forward to later tax years and use it to pay other benefits at that time.

If you have a capital gain or loss to report on your taxes, you’ll need to fill out several forms to accompany your Form 1040 or Form 1040-SR.

The first is Form 8949, Sales and Other Dispositions of Capital Property. You use this form to collect all the numbers from any 1099-B or 1099-S statements you receive about stock or other market transactions to report that number on your Form 1040.

Form 1099-B is a statement that reports sales from merchant accounts. The brokerage or financial institution that did the transaction must send you the form, and send it to the IRS. Form 1099-S is for real estate purchases.

There are two categories: one for short-term benefits and one for long-term benefits. For both, you’ll need an explanation of what you sold, when you acquired it and sold it, the cost basis, and any changes. From there, you will subtract to get the amount of gains and losses.

You will combine all gains and losses in total for both types of gains.

Once you have the total amounts for both short-term and long-term benefits, you’ll transfer those numbers to Schedule D on Form 1040.

Also, there are separate sections for reporting short-term and long-term gains and any carryover losses.

At the bottom of the form, you’ll do calculations and follow other instructions to find the numbers to enter on Form 1040 or Form 1040-SR.

The last step is to take the number you get from this form and put it on line 7 of Form 1040.

Note: Consider consulting a tax professional as calculating capital gains tax can be complicated.

Look on the bright side: You made money, even if you have to pay capital gains tax. But there are strategies you can use to lower those taxes.

Since the tax rate is lower on long-term capital gains than short-term capital gains, it makes sense to try to hold on to the asset for at least a year.

You always hear why it’s good to invest in a 401(k) or other retirement plan. Here’s another: These accounts grow tax-free or tax-deferred, meaning you don’t have to worry about taxes.

“The tax associated with short-term gains and gains is deferred until the withdrawals from traditional accounts occur,” explains Watson of the Tax Foundation.

This strategy also includes investments in traditional IRAs, Roth IRAs, 529 savings plans, health savings accounts, and more.

Read more: FSA vs. HSA: Which account is right for you?

We haven’t talked much about capital gains on the sale of a home, but keeping and using your home as your primary residence for at least two of the last five years may allow you to take out some of the proceeds from the sale of the home.

If you qualify, you can deduct up to $250,000 if you’re single or $500,000 if you’re married filing jointly.

Tax loss harvesting is a strategy where you sell something at a loss to reduce the gains you made on another investment and then reinvest that money in the same investment.

It is a complex strategy with many rules and regulations regarding timing, what you can and cannot invest in, and more. It is better to get professional advice because if done right, you can save a lot of money in taxes.

Like many tax concepts, capital gains can be a bit confusing. It’s okay to ask for help.

“A tax professional can help determine the basis of gross income and expenses to determine the tax owed, which in itself can be very helpful and produce tax savings,” Watson said.

Another situation where an expert can help find the “basis step-up” rule, “where the asset’s cost basis is set at fair market value when inherited,” explains Watson. “This can still generate a tax bill if there is a profit available in excess of that fair market value at the time of sale, but it may be much lower than expected if someone is not familiar with how the basic changes work.”

Capital gains tax is the tax you pay on the difference between what you paid for the property and what you made when you sold it.

What is the difference between short-term and long-term capital gains?

The time you own the asset determines whether it is a short-term or long-term benefit. One year or less is short term and longer than a year is long term.

The tax rates are different for short-term and long-term gains and depend on your taxable income. Long-term capital gains are taxed at 0%, 15% or 20%. Short-term gains are taxed like ordinary income at either 10%, 12%, 22%, 24%, 32%, 35% or 37%.

You pay huge dividends when you sell the investment (you realize the sale).