Long-Term Capital Gains Tax Rates
Hold an investment more than a year and your gain qualifies for a federal rate of 0%, 15%, or 20% — often far below your income-tax rate. Here's how the tiers work.
Don't have time? Here's what you need to know:
- 1Long-term gains (held more than one year) are taxed federally at 0%, 15%, or 20%, set by your taxable income.
- 2The gain stacks on top of your other income, so a large gain can land partly in two different rate tiers.
- 3In low-income years you can realize gains in the 0% bracket and rebuy to reset basis — no wash-sale limit on gains.
- 4High earners add a 3.8% Net Investment Income Tax, lifting the top effective federal rate toward 23.8%.
Why Long-Term Gains Get a Discount
The tax code deliberately rewards patience. When you hold an investment for more than one year before selling, the resulting gain qualifies for long-term capital-gains treatment, taxed at a federal rate of 0%, 15%, or 20% — almost always lower than the ordinary-income rate that would apply to a short-term gain. The policy rationale is to encourage long-horizon capital formation, but the practical effect for investors is a substantial, perfectly legal discount for simply waiting.
Just how big the discount is depends on your bracket. A high earner facing a top ordinary rate well above 30% might pay only 15% or 20% on a long-term gain. For lower-income investors, the gap is even more dramatic, because the lowest long-term tier is 0%. The dividing line is always the same: more than one year of holding, counted from the day after purchase to the day of sale.
The 0%, 15%, and 20% Tiers
Long-term gains fall into three rate tiers based on your total taxable income, which includes the gain itself. The 0% rate applies up to the first income threshold, the 15% rate covers the broad middle, and the 20% rate kicks in only at the top. The IRS adjusts these income breakpoints for inflation every year, so the exact dollar cutoffs drift — always confirm the current-year figures rather than memorizing a number.
It's important to understand the tiers stack the way ordinary brackets do: the gain stacks on top of your other income. If your ordinary income partly fills the 0% band, only the remaining room is taxed at 0%, and gains spilling above it move into 15%. You don't get the whole gain at 0% just because part of it fits. The table below shows the structure conceptually — the income levels shift yearly.
| Long-term rate | Applies to | Roughly who pays it |
|---|---|---|
| 0% | Income up to the first IRS threshold | Lower-income filers, low-income years |
| 15% | The broad middle income range | Most middle-income investors |
| 20% | Income above the top IRS threshold | The highest earners |
Important: Check current IRS thresholds before acting — the income breakpoints for the 0/15/20% tiers are adjusted annually and the numbers you remember from a prior year will be wrong.
Using the 0% Bracket on Purpose
The 0% tier is one of the most underused tools in personal tax planning. In a year when your income dips — early retirement before claiming Social Security, a sabbatical, a gap between jobs, or a year living off cash — you may have room in the 0% long-term bracket. You can deliberately sell appreciated ETF shares to realize gains that are taxed at literally nothing, then immediately rebuy them to reset your cost basis higher. This "gain harvesting" permanently erases that slice of embedded gain at zero cost.
Unlike loss harvesting, gain harvesting is not blocked by the wash-sale rule, because the wash-sale rule only applies to losses. You can sell and instantly repurchase the same ETF to lock in the higher basis. The catch is that the realized gain still counts as income, so it can nudge other thresholds — pushing more of itself into the 15% band, affecting Social Security taxation, or raising Medicare premiums. Model the full picture, ideally with a tax professional, before harvesting gains.
Tip: Gain harvesting and loss harvesting are mirror images. Harvest losses in high-income years to cut your bill; harvest gains in low-income years to reset basis for free. Both reward attention to which bracket you're in.
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What Else Rides on Long-Term Treatment
Qualified dividends — the kind paid by most plain U.S. stock ETFs like VOO — are taxed at these same 0/15/20% long-term rates, not at ordinary rates, which is a quiet bonus of holding broad equity funds in a taxable account. This is why a tax-efficient stock ETF can be remarkably gentle on your tax return: both its qualified dividends and its eventual long-term gains enjoy the preferential rates.
Two surtaxes can sit on top, though. High earners owe the 3.8% Net Investment Income Tax once income passes the IRS threshold, lifting the effective top rate on long-term gains toward 23.8% federally. And many states tax capital gains as ordinary income with no long-term discount at all. Even so, for the vast majority of investors, long-term capital-gains treatment remains one of the best deals in the tax code.
Frequently Asked Questions
What are the long-term capital gains tax rates?
Federally, long-term capital gains are taxed at 0%, 15%, or 20%, depending on your taxable income for the year. The lowest tier applies to lower-income filers, 15% covers most middle-income investors, and 20% applies only to the highest earners. The IRS adjusts the income cutoffs each year, so check the current figures.
How do I qualify for the 0% capital gains rate?
Your taxable income (including the gain) must fall within the lowest income tier the IRS sets each year. This often happens in low-income years — early retirement, a career break, or a low-earnings year. You can deliberately realize long-term gains in those years to pay 0% federal tax on them.
Does the long-term capital gains rate stack on top of my income?
Yes. Your other income fills the lower brackets first, and the long-term gain stacks on top to determine which 0/15/20% tier it falls into. A large gain can push part of itself from one tier into the next, so you may pay a blend of rates rather than a single flat rate.
Are qualified dividends taxed at long-term capital gains rates?
Yes. Qualified dividends are taxed at the same 0%, 15%, or 20% rates as long-term capital gains, rather than at ordinary-income rates. Most dividends from broad U.S. stock ETFs are qualified if you meet the holding-period requirement, which makes those funds quite tax-friendly in taxable accounts.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.