When it comes to personal finance, investing, and real estate, few items spark as much concern – and confusion – as capital gains and the taxes associated with capital gains. Whether you’re flipping a piece of property, you have some stocks to sell, or you are simply cashing in after years of holding an asset, understanding capital gains, understanding the taxes related to capital gains, and understanding how to possibly avoid or mitigate capital gains taxes legally is imperative.

This guide explains it all, including what capital gains are, how they’ll be treated in the tax system in 2025, how to determine your tax liability, and how to take actions that allow you to make better decisions to keep more of your money in your pocket!

What Are Capital Gains?

Capital gains are simple: they are the profit you make from selling a capital asset. Capital assets come in many forms, including but not limited to stocks, bonds, mutual funds, property, precious metals, cryptocurrency, and fine art, to name a few. If you purchased an asset for $5,000 and sold it for $9,000, you realized a capital gain of $4,000.

However, be aware capital gains are not taxable until they are realized. If your stock is worth more today than when you bought it but you have not sold the stock, then you have an unrealized capital gain, and you don’t pay taxes until you sell the stock.

There are two types of capital gains:

• Short-term capital gains – Short-term capital gains are the gain of selling assets that you held for a year or less.
• Long-term capital gains – Long-term capital gains are the gain of selling assets that you held for more than a year.

The type is important because there is a difference in tax rate on short- and long-term gains—and the difference can be substantial.

How Are Capital Gains Taxed in 2025?

In 2025, the IRS still makes a distinction between short- and long-term capital gains for tax purposes:

Short-term capital gains are taxed at your ordinary income tax rate, which could be as high as 37% depending upon your federal tax bracket.

Long-term capital gains are given preferential tax treatment and are taxed at 0%, 15%, or 20% depending upon your income.

Here is a look at the long-term capital gains tax brackets for 2025:

Filing Status	0% Rate	15% Rate	20% Rate
Single	Up to $47,025	$47,026 – $505,150	Over $505,150
Married Filing Jointly	Up to $94,050	$94,051 – $561,650	Over $561,650
Head of Household	Up to $63,000	$63,001 – $537,100	Over $537,100

These rates do not include state taxes, the 3.8% Net Investment Income Tax (NIIT) for high-income earners, or any exceptions for collectibles, small business stock, or depreciation recapture.

How to Calculate Capital Gains Tax

Calculating capital gains tax is easier than you might expect:

• Identify your cost basis (what you paid for the asset, in addition to commissions or fees).
• Take the sale price and subtract your cost basis to determine your capital gain (or loss).
• Differentiate whether your gain was short- or long-term based on how long you held the asset.
• Then apply the correct tax rate based on the type of gain, as well as your income.

Here’s an example:

• You bought 100 shares for $3,000.
• Two years later, you sold the shares for $4,800.
• You have $1,800 in long-term capital gains.
• If you are in the 15% bracket, you owe $270 in capital gains tax.

However, if you sold them after just 6 months, your gain would be short-term and would be taxed at your regular income tax rate, which could be many times higher.

Capital Gains on Real Estate

Real estate is where capital gains tax becomes a little more complicated—and usually, more favorable. You can exclude up to $250,000 in gains if you sell your primary residence (or $500,000 if you are married and filing jointly), but there are rules:

• You have to have owned the home and lived in it for 2 out of the last 5 years.
• You can only qualify for the exclusion once every two years.

If you sell investment property, there is no exclusion, but you may be able to defer the tax using a 1031 like-kind exchange, which means you will reinvest the proceeds in a similar type of property.

Finally, real estate has depreciation recapture, where the IRS taxes your prior depreciation deductions at 25% maximum tax rate. Always consider this when estimating your tax liability.

How Capital Gains Work for Inherited Property

If you inherit an asset, any type of asset, including real estate, stocks or any other asset, you generally receive a stepped-up basis. That means, your cost basis is adjusted to the fair market value of the asset on the date of death.

For example, if your grandfather bought a house for $100,000, but it was worth $400,000 when you inherited it, your cost basis is $400,000. When you sell it shortly thereafter for the same price of $400,000, you will owe no capital gains taxes.

This technique could cut down your tax exposure, particularly with properties or long-held investments.

Capital Gains vs. Ordinary Income: Are They the Same?

Capital gains are treated differently than wages and self-employment income, but they increase your total taxable income, which could push into a higher tax bracket or alter your eligibility for tax credits or benefits (like the ACA premium subsidies).

Short-term capital gains are taxed as ordinary income, so they are the biggest detractors of your overall tax bill. Generally long-term capital gains are less damaging and receive preferential treatment with tax rates.

How to Avoid/Reduce Capital Gains Taxes?

It’s nearly impossible to legally avoid capital gains taxes, but there are a number of good methods to reduce what you could owe.

1. Hold Investments Longer

If you can hold your investment long enough to be taxed at long-term rates (the investment should be held longer than 1 year), this would be your most beneficial strategy.

2. Offset Gains With Losses (Tax-Loss Harvesting)

You can also offset any gains with capital losses, plus if your capital losses exceed your gains, you get to take up to $3,000 deduction against your other income each year ($1,500 dollars if married filing separately). Any remaining losses can be carried forward indefinitely.

3. Use your retirement account

Investing using a Roth IRA, a 401(k), or HSAs lets you experience tax-free or tax-deferred gains.

• Roth IRA: Pay taxes now, avoid capital gains when you make qualified withdrawals.
• Traditional IRA: No tax while trading, pay taxes later on withdrawals.

4. Make charitable donations with appreciated assets

If you donate charity appreciated stocks/assets, you can deduct the full market value and avoid capital gains tax entirely.

5. Strategically gift assets

If you gift appreciated assets to family members in lower tax brackets, the total tax paid may be lower when they go to sell the asset. Watch out for kiddie tax (unearned income above $2,300 is taxed at the parents’ rate) and gift tax rules.

6. Use a 1031 Exchange (for real estate investors)

The IRS permits you to use a 1031 exchange, which is an IRS rule that permits you to defer capital gains tax when you sell one property and buy another similar property, reinvesting sale proceeds into it.

FAQs

What if I sell my house?

You may qualify for a home sale exclusion, which lets you avoid paying CGT on gains up to $250K/$500K. If the home was an investment property or you don’t qualify based on residency, you owe taxes.

What if I sell inherited property?

Most inherited property will not result pending capital gain due to the step-up in basis unless you are the unfortunate beneficiary of property that significantly increased in value after your inheritance.

What if I reinvest the money?

Other than reinvesting in a tax-sheltered account (Roth IRA), or selling in a tax-deferred manner such as 1031 exchange in real estate, you are not avoiding tax just because your intention is to “reinvest” in the same stock once again. Selling and purchasing back the stock you just sold will still trigger a taxable event.

Is there capital gains tax on cryptocurrency?

Yes. The IRS treats crypto as property, not as currency. Selling crypto, converting crypto into fiat, or trading one coin for another are all taxable events.

Are there capital gains taxes on Roth IRAs?

No. Roth IRAs grow tax-free, and all qualified withdrawals including gains are not taxed.

Do I pay capital gains tax immediately?

No. You typically pay capital gains tax at tax time with your annual tax filing. But, if you had a large gain, you may have to make estimated payments to avoid penalties from the IRS.

Special Notes for 2025

• The 3.8% Net Investment Income Tax (NIIT) that applies for high earners will still present additional capital gains tax if you are making over $200,000 (single) or $250,000 (married).
• Legislative proposals on long-term capital gains tax have discussed raising the top rate, but nothing significant has changed since in 2025. We should keep track in case anything changes later in the year.

Conclusion

Capital gains tax is a subject that impacts almost every adult at some point, whether it is from investing, sales of a home, or inherited property. Although capital gains tax may seem complex at first glance, the main rules are fairly straightforward once you understand the type of gain, your income status, and the available tax strategies.

By understanding how to correctly report, calculate and reduce your capital gains tax, you will have more control over your future. Just as a reminder, if you are considering a big transaction always consider checking with a tax advisor first to ensure compliance and you are optimized.

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