Capital gains tax on investments

This page describes US federal rules in general terms. It is not tax advice; check current rates and your own situation.

Realised gains

You owe capital gains tax only when you sell an investment for more than you paid. A rising stock you still hold has an unrealised gain and no tax yet.

Short-term versus long-term

Held	Taxed as	Federal rate
One year or less	Short-term gain	Your ordinary income rate, up to 37%
More than one year	Long-term gain	0%, 15% or 20%, depending on income

Higher earners may also owe the 3.8% net investment income tax. States may add their own tax.

Why it matters for strategies

A strategy that trades often realises mostly short-term gains. The same pre-tax return can leave much less after tax than a buy-and-hold approach. See Portfolio turnover.

Ways to reduce it

Hold over a year where it makes sense.
Tax-advantaged accounts such as a 401(k) or IRA: trades inside them are not taxed each year.
Tax-loss harvesting: sell losing positions to offset gains; up to $3,000 of net losses a year can offset ordinary income. The wash-sale rule disallows the loss if you buy the same or a substantially identical security within 30 days.

Dividends

Qualified dividends are taxed at long-term rates; others at ordinary rates.

Questions

Do I pay tax if I do not sell?

Not on price gains. Tax on gains is due when you sell. Dividends are taxed in the year they are paid, in a taxable account.

Short-term	Held one year or less; ordinary income rates
Long-term	Held over a year; 0%, 15% or 20%
Taxed when	You sell (realise) the gain
Extra	3.8% net investment income tax at higher incomes