Eight Ways to Save Money with Long-Term Capital Gain Tax Rates

This powerful tax-saver is available to investors at all income levels.

Posted February 17, 2024

Every year, long-term capital gain tax rates provide U.S. taxpayers with more than $200 billion in tax savings. Wealthy individuals, who pay up to 37% on ordinary income (such as wages and interest income) pay only 20% when they qualify for these rates. Middle-income taxpayers pay 15%, while folks in the lowest brackets pay the best rate of all: 0%. We’re going to look at eight ways you can benefit from these rates. But first, let’s understand just how much we can save.

0% Rate

Yes, the first rate is 0%.

Regular income tax rates begin at 10% and go up from there. Various deductions allow some of our income to escape taxation, but there is no 0% bracket for ordinary income. Yet there is such a bracket for long-term capital gain. These profits can be part of your taxable income (the income that’s left after subtracting deductions) but “taxed” at the rate of 0%.

The 0% rate isn’t available to the high-income taxpayers who garner vast amounts of capital gain. Yet this bargain basement rate isn’t reserved solely for taxpayers without the means to save and invest. A couple with $100,000 in gross income (that is, income before claiming deductions such as the standard deduction) can tack on a long-term capital gain of $15,000 or more without paying any additional tax. The same amount of taxable interest income would hit them with at least $1,800 in additional tax.

Thresholds for long-term capital gain tax rates

2024 Capital Gain Rate Thresholds
15%20%
Single47,025518,900
Married filing jointly94,050583,750
Head of household63,000551,350
Married filing separately47,025291,850
Rate is 0% up to the first threshold.

The basics of long-term capital gain tax rates are simple. We have just three rates: 0%, 15% and 20%. The income ranges where these rates apply depend on your filing status. Figures for 2024 appear in this table. (Figures for other years are available in our Reference Room.) As you can see, the 20% rate applies only at high levels of income.

These thresholds refer to taxable income — in other words, income reduced by any deductions you’re able to claim. Most of us can at least claim the standard deduction ($14,600 for singles and double that for couples filing jointly in 2024), so the amount of overall income we can have before moving into the next bracket is considerably more than these numbers suggest.

Here’s a chart of 2024 long-term capital gain tax rates for single taxpayers, taking the standard deduction into account.

Chart of long-term capital gain tax rates in 2024

Regular income tax rates compared

The importance of these long-term capital gain rates becomes obvious when we compare them to rates that apply to other categories of income. Collectively, items such as interest income and wages, to which the regular rates apply, are known as ordinary income.

Chart shows how long-term capital gain rates differ from rates for ordinary income.

Just look at all that real estate shaded green, representing savings from the long-term capital gain tax rates! U.S. taxpayers benefit to the tune of nearly a quarter of a trillion dollars each year. And that’s not counting such related benefits as the limited exclusion of gain on home sales and tax-free step-up of basis at the owner’s death.

Stacking

If you have ordinary income and long-term capital gain, the regular income tax rates apply first. This is known as a stacking rule: long-term capital gain is stacked on top of (after) ordinary income. For example, if your taxable income consists of $70,000 of ordinary income and $40,000 of long-term capital gain, you pay regular tax rates (the tax under the green line) up to $70,000, plus long-term capital gain rates (the tax under the orange line) from $70,000 to $110,000. Note that part of the ordinary income escapes tax because of the standard deduction.

Chart shows capital gain stacked after ordinary income.

Various factors in addition to stacking can affect the capital gain calculation, making it difficult to nail down a number. IRS instructions for Schedule D, the part of your tax return that reports capital gains, provide a Schedule D Tax Worksheet with 47 lines extending over two pages — and that worksheet deals with only part of the overall calculation. Complexities of this kind are a big part of why so many people use tax software, or tax professionals, to prepare their returns.

Net investment income tax

You may be aware that when income exceeds certain thresholds, the tax on long-term capital gains gets bumped up another 3.8%. This happens because of the net investment income tax, sometimes known by its initials, NIIT. Three things you may want to know about NIIT:

  • The threshold where it kicks in is based on adjusted gross income, modified to take into account certain excluded items of foreign income. You can’t claim the standard deduction, or itemized deductions, against NIIT.
  • The threshold where NIIT starts to apply is not adjusted for inflation.
  • If you’re married filing jointly, you might expect your NIIT threshold to be double the amount for single filers, but you’ll be disappointed. Single filers get a $200,000 threshold, but the figure for joint filers is $250,000.

Here’s what the long-term capital gain rates for single taxpayers look like when NIIT is taken into account:

Chart shows net investment income tax added to long-term capital gain tax

Above the threshold for this tax, you’re actually paying 18.8% or 23.8%, rather than 15% or 20%, on your long-term capital gain.

For the most part, this added tax doesn’t cut into the advantage of long-term capital gain over ordinary income. NIIT applies to investment income that’s taxed at the higher rates, such as interest income and short-term capital gain. Self-employment income bears Medicare taxes that add up to 3.8% above the same threshold. The same is true for wages, though part of the Medicare tax is paid by the employer.

Higher rates for some items

Before we get to the good stuff, there’s some not-so-good stuff to mention. Certain items, even while qualifying as long-term capital gain, don’t qualify for the most favorable rates, for one reason or another.

Collectibles

The term is somewhat misleading. The tax law lists the following items as collectibles:

  • works of art,
  • rugs or antiques,
  • metals or gems,
  • stamps or coins, and
  • alcoholic beverages.

Exceptions are made for certain coins and bullion. The lists omits many items we might think of a collectibles (and possible investments), such as comic books (a copy of Superman No. 1 from 1939 was reported sold for $5.3 million in 2022) or baseball cards (that same year someone paid $12.5 million for a Topps Mickey Mantle card from 1952). The Treasury has the authority to specify other tangible personal property as collectibles, but so far has not done so. Recently, though, the IRS said it’s considering the extent to which nonfungible tokens (NFTs) may be considered collectibles. In preliminary guidance, the agency said it would apply a look-through analysis where appropriate. An NFT used to certify ownership of a gem, for example, would be considered a collectible because a gem is a collectible.

The original reason for creating the “collectibles” category was to prohibit IRAs from investing in them. Congress believed these were not suitable investments for retirement savings. More relevant for purposes of this article, the most favorable long-term capital gain tax rates don’t apply to collectibles. Instead, the tax rate on these gains is capped at 28%. You won’t benefit from this cap unless your income is high enough to be taxed in the higher tax brackets.

References: IRS Publication 550, Investment Income and Expenses; IRC section 408(m) (collectibles defined); IRS Notice 2023-27 (NFT as collectibles).

Certain real estate gains

Depreciation deductions can contribute to the amount of gain you report when selling real property. For example, suppose you buy a rental property for $700,000 and over a number of years claim depreciation deductions that add up to $100,000. These deductions reduce your basis to $600,000, so that if you now sell the property for $850,000, you report gain of $250,000. Of that amount, $150,000 represents an increase in the value of the property, which will be taxed at the normal rates for long-term capital gain. The other $100,000 is attributable to depreciation deductions. Because those deductions were allowed against ordinary income, they can be recaptured as ordinary income or, more often, treated as unrecaptured section 1250 gain, which is taxed at a maximum rate of 25%.

Selling long-term assets

One

Now we’re ready to look at how you can use these favorable rates. First is the most obvious: holding an asset of some kind for more than a year, then selling it for a profit.

Let’s be clear about what counts as more than a year for this purpose. Some people figure it should be good enough to sell on the anniversary of the purchase date, because they owned the asset 366 days (or 367 if a leap day intervened). That’s common sense, but it’s not how the rules work. Your holding period includes the date of sale but not the date of purchase. To be precise, your holding period changes from short-term to long-term on the anniversary of the day after your purchase. If you buy on June 12, the first day you can sell for a long-term gain is June 13 of the next year.

  • Leap years create a tricky situation. Suppose you bought on February 28 the year before a leap year. You want to sell on the earliest date that will produce a long-term capital gain. You might be thinking you can sell on February 29, but that would be wrong. Your holding period began on March 1 the previous year (the day after your purchase), so you have to hold until March 1 the following year before you can sell for a long-term gain.

Your holding period can be adjusted in certain situations, such as when your purchase was part of a wash sale. If we want to be excruciatingly precise, we’ll say your sale has to come on or after the anniversary of the date your holding period began, after any necessary adjustments.

Qualified dividends

Two

Certain dividends fall into a peculiar category of income. They aren’t classified as capital gain, so they don’t enter into the calculation of net capital gain or loss. Yet they are taxed at the favorable long-term capital gain rates.

This benefit attaches only to qualified dividends. One requirement is to receive the dividend from a U.S. business corporation or certain foreign corporations. You also have to meet a holding period requirement. Usually this means holding the stock at least 61 days, but certain preferred stocks require 91 days, and the rule can become more complicated if you buy or sell options on the same stock.

  • You don’t have to satisfy the entire holding period before receiving the dividend. For example, you could buy the shares just 10 days before the ex-dividend date. You’ll receive the favorable rate on the dividend if you end up holding the shares at least 61 days.

Your broker may use shares you own to facilitate a short sale transaction by some other investor. When this happens, you won’t receive a qualified dividend, but instead will receive a “payment in lieu.” This payment doesn’t qualify for the favorable tax rate, so your broker should compensate you for losing the tax break on the dividend. Fidelity offers a good explanation.

Qualified dividend distributions

Three

This may sound like a repeat of the previous item, but it isn’t quite the same. Mutual funds don’t produce the kind of income that can be paid out as qualified dividends. Yet if they receive qualified dividends, they can pass them along to their investors. The tax report you receive from the mutual fund will tell how much of the distribution is qualified.

You get to treat this portion of a mutual fund distribution as if you received a qualified dividend, even though the qualified dividends were actually received by the mutual fund. You don’t even have to own shares at the time the mutual fund receives the dividends. However, you must meet the 61-day holding period described above with respect to the mutual fund’s distribution.

REIT. A real estate investment company (“REIT”) is similar to a mutual fund, except it invests in real estate or mortgages instead of stocks and bonds. REITs don’t produce income that can be paid out as qualified dividends, but like mutual funds, REITs that receive qualified dividends can pass them along to their investors.

Capital gain distributions

Four

We’ve already talked about how you get lower rates when you sell an asset you’ve held more than a year. This rule applies to mutual fund shares, just like any other investment. Yet if you invest in mutual funds, you can benefit from long-term capital gain tax rates without selling your shares. You merely have to receive the right kind of distribution from the fund.

Mutual funds make investments of various kinds, and in the course of a year may sell some assets they held more than a year. If these sales produce a net profit, the mutual fund has a long-term capital gain. Rather than pay tax on it, the mutual fund generally designates part of the money paid out to its shareholders as a capital gain distribution. The amount will be reported in box 2a of Form 1099-DIV. (See instructions for Schedule D if amounts also appear in in boxes 2b, 2c or 2d.) A capital gain distribution enters into your overall calculation of net capital gain or loss, and has the same tax effect as if you had that much capital gain directly.

You get to use the lower rates even if you’ve held the mutual fund shares less than a year. There’s one little catch, though. If you sell the shares for a loss after owning them six months or less, some or all of the loss will be treated as long-term loss. See Shares Held Six Months or Less.

Capital gain allocations

Five

This one seems to be pretty rare, but it’s out there, so I’ll mention it. You can have capital gain from a mutual fund even without receiving a capital gain distribution.

A mutual fund with capital gains doesn’t have to distribute them. If the fund decides to keep the capital gains, it has to pay tax on them. But then its shareholders are treated as if they had their proportionate share of these capital gains, and also as if they paid their proportionate share of this tax. I’ve never seen this rare beast, but if you’re interested, see Capital Gain Allocations.

Flow-through entities

Flow-through entities include partnerships, LLCs, S corporations, and certain trusts. We use this term (or sometimes pass-through entities) because tax consequences of their operations flow through to their owners or beneficiaries. If the entity has capital gain, you have capital gain. Same with qualified dividends.

This is not the same as a mutual fund’s capital gain allocation (number 5 above). A flow-through entity doesn’t pay tax on the income, even if it retains it. Owners pay tax without the benefit of a credit for tax paid by the flow-through entity. Usually the entity is designed to pay out at least enough for the owners to cover their anticipated tax liability, but this isn’t always guaranteed.

Net unrealized appreciation

Net unrealized appreciation, or NUA, allows you to treat part of the value paid out from a retirement account as long-term capital gain. This benefit comes with a special bonus: the amount converted from higher to lower rates escapes the net investment income tax.

These rules have been around for quite a while, but for several reasons their use isn’t widespread. To begin with, part of your retirement account has to be invested in shares of the company where you work. Not all companies offer their own shares as an investment option in their retirement plans. Even when they do, caution is advisable. Investing more than a small fraction of savings in a single company violates the principle of diversification, one of the pillars of sound investing.

But that’s not the only obstacle. You get to claim the benefit only when you take a lump sum distribution after a triggering event (terms that have special meaning in these rules). Then, the lower tax rate applies only to the increase in value (if any) of these shares after they’re added to your account. (That’s what’s meant by the phrase net unrealized appreciation.) The portion of the distribution representing the original value of the shares is taxed as ordinary income, which can’t be postponed in a rollover.

Nevertheless, when the planets align properly, this method of seizing the benefit of long-term capital gain rates can pay off handsomely. When should you pursue this strategy? The best NUA guidance we’ve found is in this article by Michael Kitces.

Incentive stock options

Some companies offer a special form of compensation called incentive stock options, often just to executives but sometimes more broadly. We won’t get into details here, but mention ISOs as another way to benefit from long-term capital gain tax rates. To secure that benefit, you need to hold shares more than a year (and sometimes longer) after you exercise the option. That may sound like the plain vanilla situation we described in number 1 above. The magic here lies in the potential to obtain capital gain treatment for growth in the stock’s value that occurred before you exercised the option. Full details appear in our book Consider Your Options.

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