For U.S. federal individual income tax, the key difference is usually the holding period. A net capital gain from an asset held more than one year may qualify for a 0%, 15% or 20% rate schedule, while a gain on an asset held one year or less is generally a short-term gain taxed at graduated ordinary-income rates. Your filing status, taxable income, capital-loss history, the type of asset and the 3.8% Net Investment Income Tax (NIIT) can change the result.
These rules apply to federal tax. State and local governments use their own rules, and the figures below are tied to the tax year identified in each section.
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The basic difference: the tax system separates ordinary income from capital gain
Ordinary income includes items such as wages, interest and short-term capital gains. It is taxed through graduated marginal brackets: an additional dollar is taxed at the rate for the bracket that dollar enters, rather than one rate necessarily applying to all of your income. The Internal Revenue Service (IRS) describes the contrast this way: “The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income.” See IRS Publication 550 (2025).
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1Fix the driver behind crashes, sound loss and screen glitches2Repair Windows errors before they cause bigger problems3Scan for outdated or missing drivers - takes under a minuteCapital-gains rates are not a blanket discount for every sale. The IRS first classifies gains and losses by holding period, nets them under special ordering rules, and then applies the appropriate rate schedule. A long-term rate can apply only to qualifying net long-term gain after that process. A short-term gain remains ordinary income even if the asset was an investment.
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Ordinary income uses graduated marginal rates
Your ordinary income is combined with other taxable income and taxed under the ordinary rate schedule for your filing status and tax year. The rate on the next dollar can differ from the average rate paid across all taxable income. Capital gains may occupy their own rate bands, but they still interact with the rest of your taxable income when determining which band applies.
Capital gains depend on the asset and holding period
A capital asset held one year or less generally produces a short-term gain or loss. An investment asset held more than one year generally produces a long-term gain or loss. The IRS summarizes the short-term rule in Topic No. 409: “Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.”
| Classification | General federal treatment |
|---|---|
| Short-term gain | Generally taxed as ordinary income after capital gains and losses are netted. |
| Long-term gain | Eligible net gain may receive the 0%, 15% or 20% schedule, subject to taxable-income and filing-status thresholds. |
| Long-term loss | Netted with gains under the capital-loss ordering rules; unused losses can generally carry forward. |
How the holding period changes the rate
The holding period is measured for each asset. Selling on or before the one-year mark generally creates short-term treatment; selling after one year generally creates long-term treatment. The difference can be substantial because a short-term gain is pushed into ordinary brackets, while eligible net long-term gain may use the preferential schedule.
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Why “net” matters
The preferential schedule applies to net long-term capital gain, not to every profitable transaction. The IRS generally nets short-term gains and losses together and long-term gains and losses together, then applies the required ordering. Net short-term gain is treated as ordinary income. A net short-term loss can reduce net long-term gain before the long-term rate schedule is applied. The detailed rules and examples appear in Publication 550 and Publication 544 (2025).
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2025 long-term capital-gain rates and thresholds
For tax year 2025, most eligible net long-term capital gain is assigned to a 0%, 15% or 20% rate according to your taxable income and filing status. These are not thresholds for gross income or modified adjusted gross income. The 0% band is the portion of eligible gain that falls while taxable income remains at or below the listed amount. The 15% band applies above that amount up to the listed ceiling; eligible gain above the ceiling is generally in the 20% band.
| Filing status | 0% rate applies up to taxable income of | 15% band extends up to taxable income of | 20% rate generally applies above |
|---|---|---|---|
| Single | $48,350 | $533,400 | $533,400 |
| Married filing separately | $48,350 | $300,000 | $300,000 |
| Married filing jointly | $96,700 | $600,050 | $600,050 |
| Qualifying surviving spouse | $96,700 | $600,050 | $600,050 |
| Head of household | $64,750 | $566,700 | $566,700 |
These figures come from the IRS’s 2025 guidance in Topic No. 409. They apply to tax year 2025; use the thresholds for the tax year of the return you are preparing. Because the rate bands are layered on taxable income, adding a gain does not automatically make the entire gain taxable at 15% or 20%.
Illustration of the 0% band
Suppose a single filer has $40,000 of taxable income before a $10,000 eligible net long-term gain in 2025. The first $8,350 of that gain brings taxable income to the $48,350 0% ceiling. The remaining $1,650 falls above that ceiling and, assuming no other adjustments or special categories, is in the 15% band. This is a marginal calculation; it does not make the filer’s other income tax-free.
Capital losses can reduce gains, but the deduction against other income is capped
Losses are not simply ignored when a portfolio has both winners and losers. Capital gains and losses are classified by holding period and netted before the preferential rate schedule is considered. This can reduce or eliminate net long-term gain for the year.
The annual deduction limit
If your net capital result is a loss after netting, an individual generally may deduct up to $3,000 against other income for the year, or $1,500 if married filing separately. The limit is described in Publication 550 and Topic No. 409.
Carryforwards preserve the character
A loss larger than the annual deduction limit generally carries forward to later years rather than disappearing. The unused amount generally retains its short-term or long-term character, which matters when it is matched with future gains. Keep the transaction records and prior-year loss schedules used to calculate the carryforward; the current return depends on those amounts.
Some gains have special maximum rates
The 0%, 15% and 20% table is the general structure for most eligible net long-term gains. Certain categories are carved out and can have a higher maximum rate:
- Collectibles: gains on collectibles can face a maximum rate of 28%.
- Certain qualified small-business stock: qualifying gain in this category can also face a maximum rate of 28%, subject to the specific statutory requirements.
- Unrecaptured section 1250 gain: the portion covered by this rule has a maximum rate of 25.
The exact computation can require separating these categories from other long-term gains. Do not place a collectible or an applicable real-estate depreciation gain into the ordinary 20% long-term column without checking the category rules. The IRS discusses these limits in Publication 550 and Topic No. 409.
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The 3.8% Net Investment Income Tax can add to the regular tax
The NIIT is a separate 3.8% tax that can apply to net investment income, including capital gains, when modified adjusted gross income (MAGI) exceeds a statutory threshold. It is calculated separately from the regular income-tax rate applied to the gain. The tax generally applies to the lesser of your net investment income or the amount by which MAGI exceeds the threshold.
| Filing status | MAGI threshold for NIIT |
|---|---|
| Single or head of household | $200,000 |
| Married filing jointly or qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
For example, if a single taxpayer has $300,000 of MAGI and $50,000 of net investment income, the excess MAGI is $100,000. The NIIT base is the lesser amount, $50,000, producing a potential $1,900 NIIT before considering the detailed definition of net investment income and any applicable exclusions. The IRS explains the computation and exceptions at Net Investment Income Tax.
Personal residence exclusion
The IRS says gain excluded from regular gross income under the personal-residence exclusion is not subject to NIIT to the extent it is excluded from regular gross income. Any gain that remains taxable can require a separate NIIT analysis; the residence rule does not automatically remove every sale-related amount from consideration.
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Capital-gain thresholds and ordinary-income brackets are both tax-year-specific. The 2025 capital-gain table above should not be paired with a different year’s ordinary brackets as if they were one schedule.
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For context, the IRS’s announcement for tax year 2026 lists a top ordinary federal marginal rate of 37% for single filers with income over $640,600 and for married couples filing jointly with income over $768,700. Those are 2026 ordinary-income figures, not 2025 long-term capital-gain thresholds. The announcement is available at IRS tax-year 2026 inflation adjustments.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to compare an ordinary-income dollar with a capital-gain dollar
A meaningful comparison requires more than asking whether one number is “income” and the other is a “gain.” Work through these questions in order:
- What tax year is being calculated? Use the rate tables and thresholds for that year.
- Was the asset held one year or less? If so, the gain is generally short-term and taxed at ordinary graduated rates.
- What is the net result after all capital transactions? Net gains and losses by holding period before applying a rate.
- What is the taxpayer’s filing status and taxable income? Those determine where eligible net long-term gain falls in the 0%, 15% or 20% schedule.
- Is the gain in a special category? Check the 25% or 28% maximum-rate rules for applicable assets.
- Does NIIT apply? Compare MAGI with the filing-status threshold and calculate the 3.8% tax separately.
- Are state and local taxes relevant? Federal rates do not determine the result in a particular state or locality.
Worked comparisons
Short-term sale
An investor buys shares and sells them after eight months for a gain. The gain is generally short-term. After netting against other capital transactions, any net short-term gain is included in the ordinary-income calculation. The investor does not get the 0%, 15% or 20% long-term schedule merely because the shares were held for investment.
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Long-term sale with room in the 0% band
An eligible investment sold after more than one year produces a net long-term gain. If the taxpayer’s 2025 taxable income before the gain is below the applicable 0% ceiling, part of the gain can fit in the 0% band. Once the gain pushes taxable income above that ceiling, the excess generally moves into the 15% band until the filing-status ceiling is reached.
High-income investor
A taxpayer can face the regular long-term capital-gain rate and NIIT on the same investment income. The regular rate is determined using taxable income and filing status; NIIT looks to MAGI and net investment income. Treating the 3.8% charge as part of the regular capital-gain table can understate the total federal burden.
Practical filing checklist
- Record the purchase and sale dates for each asset so the holding period is supportable.
- Keep basis and adjustment records, sale statements and information returns.
- Separate short-term and long-term transactions before netting.
- Bring forward unused capital losses from prior returns and preserve their character.
- Identify collectibles, qualified small-business stock and unrecaptured section 1250 gain before using the general rate table.
- Calculate taxable income for the capital-gain bands and MAGI separately for NIIT.
- Check the tax-year instructions and your state and local rules rather than carrying forward an old year’s thresholds.
IRS Publication 550 covers investment income and expenses, while Publication 544 covers sales and other dispositions of assets. They provide the detailed ordering and category rules needed when a transaction does not fit the simple stock-sale example.
Quick Recap
Common mistakes to avoid
- Calling every investment gain “long term”: the one-year holding-period test controls.
- Applying 15% to the entire gain: the rate bands are marginal and depend on taxable income.
- Ignoring losses: netting can materially change the amount eligible for preferential rates, and excess losses generally carry forward.
- Using MAGI for the regular capital-gain bands: the 0%, 15% and 20% thresholds use taxable income; MAGI is central to NIIT.
- Overlooking special categories: collectibles and certain other gains have different maximum rates.
- Mixing years: a 2025 capital-gain threshold and a 2026 ordinary bracket do not form one tax-year calculation.
- Assuming federal treatment settles the bill: state and local tax treatment varies.
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