How Capital Gains Are Taxed: Federal and State Rules

Long-term vs short-term capital gains, federal LTCG brackets, the 3.8% NIIT, and how states from Washington to Florida treat investment gains.

Capital gains arise when you sell an asset for more than you paid. The tax treatment depends on how long you held the asset and where you live. At the federal level, long-term gains (assets held over one year) receive preferential rates; short-term gains (one year or less) are taxed as ordinary income at rates up to 37%.

Federal long-term capital gains brackets for 2025 are 0%, 15%, and 20%. For single filers: 0% applies to gains that, when added to other income, keep taxable income under $47,025; 15% applies from $47,026 to $518,900; and 20% applies above $518,900. Married couples filing jointly have roughly doubled thresholds.

Short-term gains get no preference. They are included in ordinary income and taxed at your regular bracket rate. A high earner with $500,000 in short-term gains could owe 37% federal tax on that amount, plus state tax. Holding an asset just over one year can shift the same gain from 37% to 20% — a major planning opportunity.

The Net Investment Income Tax (NIIT) adds 3.8% on net investment income above $200,000 for single filers ($250,000 for married filing jointly). This threshold is not indexed for inflation. Net investment income includes capital gains, dividends, interest, and rental income. The 3.8% applies to the lesser of (a) your net investment income or (b) the amount by which your MAGI exceeds the threshold.

State rules vary widely. Nine states have no income tax and thus no tax on capital gains: Alaska, Florida, Nevada, New Hampshire (as of 2025, with its interest/dividend tax repealed), South Dakota, Tennessee, Texas, Washington (for general income — see below), and Wyoming.

Washington is a special case. It has no general income tax but imposes a 7% excise tax on long-term capital gains above a standard deduction (approximately $270,000, adjusted for inflation). Gains above $1 million face a higher tier. Wage earners pay nothing; investors with large realized gains do.

Among states that tax income, most treat long-term capital gains the same as ordinary income. California, New York, and New Jersey tax LTCG at full ordinary rates, with California's top rate at 13.3%. A few states offer partial exclusions or preferential rates for certain gains, but they are the exception.

Tax-loss harvesting can offset gains. If you sell an asset at a loss, you can use that loss to reduce taxable gains (and up to $3,000 of ordinary income per year). Losses in excess of gains can be carried forward. Strategic selling of losers to offset winners can reduce your effective capital gains rate.

Use the TaxMath calculator to model your capital gains under different federal and state scenarios. Compare how the same gain would be taxed in a no-income-tax state versus a high-tax state to inform investment and residency decisions.