Ask the Editor, May 16 — Reader Questions on Capital Gains

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on capital gains. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Capital gains tax rates

Reader Question: What are the federal capital gains tax rates for 2025? And what are the income cut-off points for the various rates?

Joy Taylor:
Long-term capital gains, which are profits from the sale or exchange of capital assets held for more than a year, get favorable federal tax rates. They are taxed at 0%, 15% or 20%. Prior to 2018, the determination of which rate you'd qualify for was based on your tax bracket. Through the end of 2025, the rate is based on set income thresholds, which are adjusted annually for inflation. Note that these same favorable rates also apply to qualified dividends.
For 2025, the income thresholds are:

• The 0% rate applies at taxable incomes up to $48,350 for single filers, $64,750 for head-of-household filers and $96,700 for joint filers.
• The 20% rate starts at $533,401 for single filers, $556,701 for head-of-household filers and $600,051 for joint filers.
• The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates discussed above, there are a couple of exceptions. Long-term capital gains from the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. Depreciation recapture from real estate sales is taxed at as much as 25%. Short-term capital gains, which are profits from the sale or exchange of capital assets held for 12 months or less, are taxed at ordinary income rates.

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2. The 0% tax rate

Reader Question: Can you explain how to qualify for the 0% federal tax rate on long-term capital gains and qualified dividends?

Joy Taylor:
For 2025, if taxable income other than long-term gains and dividends doesn't exceed $48,350 on single-filed returns, $64,750 on head-of-household returns or $96,700 on jointly filed returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

These figures are a bit lower for 2024 tax returns, since they are adjusted annually for inflation: $47,025 for single filers, $63,000 for head-of-households, and $94,050 for joint filers. Note that although these 0%-rate gains might not be taxed at the federal level, they do increase adjusted gross income. Also, some states tax capital gains as ordinary income.

Here are three scenarios to illustrate the 0%-rate rule. In all three scenarios, you have a married couple with $18,000 of qualified dividends and long-term capital gains in 2025, which are included in taxable income.
In the first scenario, the couple has $77,000 of taxable income.
The full $18,000 of gains and dividends is taxed at the 0% rate.
In the second scenario, the couple has taxable income of $104,000.
$10,700 of the gains and dividends ($96,700 - ($104,000 - $18,000)) gets the favorable 0% tax rate, and $7,300 is taxed at the 15% rate.
In the third scenario, the couple has $120,000 of taxable income.
The 0% rate doesn't apply, and the full $18,000 of gains and dividends is taxed at 15%.

3. Capital gains indexing

Reader Question: Is there any effort in Congress to provide some sort of inflation indexing for capital gains?

Joy Taylor
As you might be aware, the White House and congressional Republicans are negotiating a tax package that would extend the expiring provisions in the 2017 Tax Cuts and Jobs Act and make some other tax changes.

There has been no talk about changing the taxation of capital gains, with one exception. Free-market groups and some Republican lawmakers would like to see capital gains indexed to inflation each year. Essentially, if this concept were enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and the time of sale. For example, say you bought stock in early 2010 for $10,000 and sold it in January 2024 for $35,000. Absent indexing, you would have a $25,000 long-term capital gain. With indexing, using the Chained CPI inflation measure, your basis in the stock would jump to $13,740, making your gain $21,260, thus lowering the amount of capital gain tax you would pay.

Senator Ted Cruz (R-TX), a long-time proponent of capital gains indexing, has introduced a bill that would allow inflation indexing for purposes of calculating a capital gain or loss. His proposal would use the gross domestic product deflator as the index for measuring inflation.

It's hard to know right now whether capital gains indexing would make it into the tax package. There are lots of complexities associated with it, including choosing the appropriate index; tax basis doesn’t remain static over time; and indexing would add to the federal debt. And we don't know where President Trump stands on the idea. During his first term as president, he was all over the board. He touted the idea several times, but then also nixed it.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to gifts, tax credits for installing solar panels in a home and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

More Reader Questions Answered

• Ask the Editor, May 23, 2025: Gifts, Estate Tax
• Ask the Editor, May 4, 2025: Tax deductions and losses
• Ask the Editor, April 25, 2025: 529 plans.
• Ask the Editor, April 18, 2025: Amended returns.
• Ask the Editor, April 11, 2025: IRAs, RMDs and PTPs.
• Ask the Editor, April 4, 2025: The new tax bill, estate tax, and muni bonds.