Short-Term vs Long-Term Capital Gains Tax Rates 2025: A CPA's Reference Guide

The difference between a short-term and long-term capital gain for a client in the 24% ordinary income bracket is 9 to 14 percentage points of federal tax — the difference between paying 24% and paying 15% (or 15% + 3.8% NIIT for higher earners). The holding period threshold is one year: assets sold on or before the one-year anniversary are short-term; assets sold after it are long-term. For high-income clients with unrealized gains in taxable accounts, timing the sale across a holding period anniversary is one of the simplest and most reliable tax planning moves available. Below are the 2025 rate tables, the key exception categories every CPA must know, and the planning frameworks that govern each client situation.

2025 Long-Term Capital Gains Rate Thresholds

Long-term capital gains rates apply to capital assets held more than one year before sale. The applicable rates and 2025 taxable income thresholds (per IRS Rev. Proc. 2024-40 and IRC §1(h)) are:

The 0% rate is a significant planning tool for clients with modest taxable income — a client in the 12% ordinary income bracket realizes long-term capital gains completely free of federal tax. Harvesting gains in low-income years (job loss, large deductible loss, retirement transition) can permanently eliminate tax on accumulated appreciation.

Important: These thresholds apply to taxable income after subtracting the standard or itemized deduction — not to AGI. A client with $60,000 of AGI and a $15,000 standard deduction has $45,000 of taxable income and falls within the 0% LTCG bracket for 2025 (single filer).

2025 Short-Term Capital Gains Rate Thresholds

Short-term capital gains — gains on assets held one year or less — are taxed at the same rates as ordinary income. For 2025 (per IRS Rev. Proc. 2024-40 and IRC §1(a)–(d)):

For a client in the 35% or 37% ordinary income bracket, triggering a short-term gain versus waiting for long-term treatment carries an additional 15 to 17 percentage points of federal tax on the same economic gain. At $500,000 of gain, that differential exceeds $75,000.

Side-by-Side Comparison for Common Client Scenarios

Assumes NIIT applies at 37% bracket (MAGI exceeds $200,000 single / $250,000 MFJ). See NIIT section below.

The 3.8% Net Investment Income Tax (NIIT)

The Net Investment Income Tax under IRC §1411 imposes an additional 3.8% surcharge on the lesser of: (1) net investment income, or (2) the amount by which modified adjusted gross income (MAGI) exceeds the applicable threshold.

For 2025, the NIIT thresholds remain $200,000 (single) and $250,000 (married filing jointly). These thresholds have never been indexed for inflation since the ACA enacted them in 2013, which means an increasing share of clients cross them each year.

Net investment income includes:

• Capital gains (both short-term and long-term)
• Dividends, interest, annuities, royalties
• Passive income from rental activities and pass-through entities

Net investment income excludes active trade or business income, wages, self-employment income, and distributions from qualified retirement accounts.

Combined maximum LTCG rate for high earners: 20% (LTCG rate) + 3.8% (NIIT) = 23.8%. For short-term gains at the highest bracket: 37% + 3.8% = 40.8% if NIIT also applies — though the 3.8% NIIT cannot exceed the actual NII, so this stacking only applies when there is sufficient net investment income to absorb it.

Planning implication: For clients just above the NIIT threshold, a capital gain reduction strategy — partial loss harvesting, installment sale treatment, or deferring the sale year — reduces tax by 23.8% on the portion of gain above the threshold rather than 20%. Conversely, clients just below the threshold who receive a large distribution or capital gain may cross it inadvertently; model MAGI carefully before year-end.

Unrecaptured §1250 Gain: The Rate That Often Surprises Clients

Not all long-term gains on real property qualify for the 15%/20% LTCG rate. The IRC §1(h)(1)(D) rate for unrecaptured Section 1250 gain is capped at 25% — meaning a client selling rental property after years of depreciation deductions faces a blended rate structure on the total gain.

The mechanics (covered in depth in our depreciation recapture guide):

1. The portion of gain equal to cumulative straight-line depreciation taken is unrecaptured §1250 gain — taxed at a maximum 25% rate
2. The remaining appreciation above original cost (if any) is taxed at the standard 0%/15%/20% LTCG rates based on taxable income
3. NIIT can apply to both components if the client is above the MAGI threshold

For clients with significant accumulated depreciation, the effective blended rate on a real property sale is typically between 20% and 28% federal — not the 15% they may expect. This is one of the most common client education moments CPAs face, and getting the explanation right matters for trust and planning.

Cost segregation interaction: Accelerated depreciation components from a cost segregation study that are classified as §1245 personal property face ordinary income recapture under IRC §1245 — not the capped 25% §1250 rate. Fully depreciated personal property components trigger recapture at the client's full ordinary income rate when the property is sold, which can make short-recovery-period property more expensive to sell than building structure.

§1202 Qualified Small Business Stock: A 100% Exclusion

For gain on the sale of Qualified Small Business Stock meeting the requirements under IRC §1202, the One Big Beautiful Bill Act (OBBBA) 2025 preserved and expanded the 100% gain exclusion available to federal income tax. The exclusion applies to gain up to the greater of $10,000,000 or 10 times the taxpayer's basis in the stock, provided the shareholder held the stock for more than five years and the corporation meets the active business and gross assets tests at the time of issuance.

QSBS qualifying gain is excluded from both regular income tax and the NIIT under IRC §1411(c)(4) — meaning the effective federal rate is 0% on qualifying gain. See our QSBS guide for the full qualification analysis.

When to Choose Each: Planning Scenarios

When holding to long-term status is clearly optimal

• Client is within weeks of the one-year holding period and the gain is material — every week of delay at 22% saves 7% on the gain
• Client expects to be in a lower tax bracket next year (retirement, sabbatical, year with large losses) — deferring past December 31 and selling in the lower-income year changes both the LTCG rate and potential NIIT exposure
• Client has capital loss carryforwards that will fully offset gains regardless of holding period — in this case, timing matters less and the character analysis applies to future gains
• Real property sale: holding long-term doesn't eliminate §1250 recapture, but it does ensure the appreciation layer (above original cost) gets LTCG rates rather than ordinary income rates

When short-term gain is acceptable or optimal

• Client has large capital loss carryforwards sufficient to offset the gain — the rate becomes irrelevant because the net gain after offset is zero
• The investment thesis has collapsed and the economic loss of holding exceeds the tax savings from waiting — a 37% short-term tax on a $100,000 gain costs $37,000; holding for long-term status on an asset that drops $50,000 in value costs $50,000
• Client is in the 0% LTCG bracket anyway — at $45,000 taxable income (single), even long-term gains face 0% tax, so the holding period is irrelevant for that portion of gain
• Planning window for a Roth conversion year: if the client is selling assets in a year when income is already high due to a Roth IRA conversion, deliberately harvesting losses against short-term gains may be more efficient than preserving long-term status

When a 1031 exchange eliminates the rate question entirely

For appreciated investment real estate, a 1031 like-kind exchange defers both the LTCG/§1250 recapture tax and any NIIT — removing the holding period analysis entirely for as long as the client continues rolling proceeds into like-kind replacement property. The tax is deferred, not eliminated, but indefinite deferral across the client's lifetime followed by a step-up in basis at death can effectively eliminate the liability entirely.

Installment Sale Treatment as a Rate-Neutral Deferral Tool

When a client cannot fully defer gain but wants to reduce the current-year tax hit, an installment sale under IRC §453 spreads recognition of both principal recovery and gain across multiple tax years in proportion to the gross profit ratio. For gains that would be taxed at 20% + NIIT, spreading recognition over five to seven years can keep annual gain recognition below the NIIT threshold, keep each year's taxable income within the 15% LTCG bracket, or smooth out the tax cost with time-value benefits.

Installment sales are not available for publicly traded securities (IRC §453(k)), inventory, or property sold at a loss. For real property transactions, the installment method is elected by default — the taxpayer must affirmatively opt out (by recognizing all gain in the year of sale) on a timely filed return.

When to Recognize a Loss Against Capital Gains

Capital losses offset capital gains dollar-for-dollar, with the character matching applicable: long-term losses first offset long-term gains, then net short-term gains (and vice versa). If losses exceed gains in any year, up to $3,000 of the excess can offset ordinary income, with the balance carried forward indefinitely (IRC §1211(b)).

Loss harvesting: Deliberately realizing losses in taxable accounts to offset gains — particularly short-term gains taxed as ordinary income — is one of the highest-value tax moves CPAs can make for clients with taxable investment accounts. A $50,000 short-term gain offset by a $50,000 harvested loss saves $18,500 in tax for a client in the 37% bracket.

Wash-sale rule (IRC §1091): A loss is disallowed if the client purchases the same or substantially identical security within 30 days before or after the sale. The disallowed loss is not permanently lost — it is added to the basis of the replacement security — but it will not generate the current-year offset. Advise clients on the 61-day window around every harvested position.

Bottom Line for CPAs

For any client with material unrealized gains in taxable accounts, the first planning question is holding period. One year and one day is a bright-line threshold that can reduce federal tax by 7 to 17 percentage points on the same gain. For real estate clients, the analysis is more layered: §1250 recapture runs at 25% regardless of holding period, the 1031 exchange is usually the superior tool for continued real estate investors, and cost segregation creates significant deferred recapture that affects the sell-or-hold decision. NIIT planning — particularly year-end MAGI control — adds another 3.8 points of value for clients near the $200,000/$250,000 threshold. The rate table is the same for all clients; the planning variables are what CPAs get paid to navigate.

Frequently Asked Questions

What is the capital gains tax rate for 2025?

For long-term capital gains — assets held more than one year — the 2025 federal rates are 0%, 15%, or 20% depending on taxable income, per IRC §1(h) and IRS Rev. Proc. 2024-40. Short-term capital gains are taxed as ordinary income at rates from 10% to 37%. High-income taxpayers also owe a 3.8% NIIT surcharge on net investment income under IRC §1411, producing a maximum effective rate of 23.8% on long-term gains and 40.8% on short-term gains at the highest bracket.

What is the exact income threshold for the 0% long-term capital gains rate in 2025?

For 2025, the 0% LTCG rate applies to taxable income (after deductions) up to $48,350 for single filers and $96,700 for married filing jointly, per IRS Rev. Proc. 2024-40. A single filer with $60,000 of AGI and a $15,000 standard deduction has $45,000 of taxable income and qualifies for the 0% rate on long-term gains.

Does the NIIT apply to capital gains from selling a business?

The NIIT applies to gains from the sale of passive activity assets and investment property. It generally does not apply to gain from the sale of an active trade or business in which the taxpayer materially participates, because active business income is excluded from the definition of net investment income under IRC §1411(c). For the sale of a business through an S-Corp or partnership, the character of gain is traced to the underlying assets — active business assets generate non-NII gain while passive assets generate NII gain. The analysis is fact-specific and requires reviewing each category of asset sold.

How long does a client need to hold an asset for long-term capital gains treatment?

The holding period requirement is more than one year — strictly speaking, the asset must be held for at least one year and one day before sale. If the client purchased stock on March 15, 2024, the earliest long-term qualifying sale date is March 16, 2025. The holding period begins on the day after acquisition and ends on the date of sale (the "date-to-date" rule under IRS Rev. Rul. 66-97).

Can capital losses from one year offset capital gains from a future year?

Yes. Capital losses in excess of capital gains in any year — after the $3,000 offset against ordinary income — carry forward indefinitely under IRC §1212(b). Long-term losses carry forward as long-term; short-term losses carry forward as short-term. When used in a future year, the carryforward retains its original character and offsets same-character gains first, then the other character. A large loss carryforward effectively provides tax-free capital gain recognition room in future years until it is exhausted.

What is the capital gains rate on collectibles?

Gain from the sale of collectibles — including art, coins, antiques, wine, and certain rare items — is taxed at a maximum federal rate of 28% for long-term gains under IRC §1(h)(5), not the standard 15%/20% LTCG rates. Short-term collectible gains are still ordinary income. The 28% rate applies regardless of the taxpayer's marginal rate if that rate is lower than 28%. NIIT can also apply on top of the 28% collectibles rate for clients above the MAGI threshold.

How are qualified dividends taxed compared to capital gains?

Qualified dividends are taxed at the same 0%/15%/20% rates as long-term capital gains under IRC §1(h)(11). To qualify, dividends must be paid by a U.S. corporation or qualified foreign corporation and the taxpayer must meet the holding period requirement — generally holding the underlying stock for more than 60 days in the 121-day window surrounding the ex-dividend date. Non-qualified (ordinary) dividends are taxed as ordinary income at the standard bracket rates.

Is there any way to eliminate capital gains tax entirely?

Several mechanisms can reduce or eliminate the capital gains tax. The §1202 QSBS 100% exclusion eliminates federal tax on qualifying small business stock gain up to $10,000,000 or 10x basis. The §121 primary residence exclusion eliminates gain of up to $250,000 ($500,000 married filing jointly) on a qualifying home sale. A §1031 like-kind exchange defers recognition of real property gains indefinitely, and a step-up in basis at death under IRC §1014 eliminates deferred gains for assets held until death. A Qualified Opportunity Fund (QOF) investment under IRC §1400Z-2 permanently excludes all appreciation earned inside the fund for investors who hold their QOF interest for 10 or more years — see Qualified Opportunity Zone Tax Incentives for current program status and who still benefits in 2026. Charitable gifts of appreciated property to a public charity allow a deduction for the full fair market value while bypassing recognition of the embedded gain entirely.

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