Capital gains tax is owed on the profit from selling an investment for more than your cost basis. The federal rate depends on two factors: how long you held the investment and your filing status and income. Assets held less than a year trigger short-term capital gains, taxed as ordinary income at rates from 10% to 37%. Assets held a year or more trigger long-term capital gains, taxed at preferential rates (0%, 15%, or 20%).
The long-term rate structure is remarkably generous. In 2025, single filers with taxable income up to $48,350 pay 0% on long-term gains. Married filing jointly enjoys the 0% rate up to $96,700. Many retirees strategically harvest gains during low-income years to rebalance portfolios tax-free. For high earners, long-term gains still benefit from the 15-20% ceiling compared to the 37% top marginal income tax rate.
State taxation adds another layer. California, Hawaii, and New Jersey tax capital gains at rates exceeding 10%; nine states (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington*, Wyoming, New Hampshire) impose no state income tax. The exact impact depends on your state's specific rules — some exclude a portion of capital gains or apply separate brackets.
Strategic harvesting can meaningfully reduce your lifetime tax bill. Common techniques include: (1) holding investments beyond the one-year mark to convert short-term to long-term, (2) tax-loss harvesting (realizing losses to offset gains), (3) gifting appreciated assets to family members in lower brackets, and (4) charitable donations of appreciated securities. A tax professional can help tailor strategies to your situation.