How the capital gains tax rate actually works

Long-term capital gains are not taxed in isolation. They stack on top of your ordinary income — W-2 wages, self-employment income, and short-term gains — and your tax rate is determined by where the total lands in the LTCG brackets. This matters because a self-employed person with $42,000 in ordinary income and $15,000 in long-term gains has a combined income of $57,000. Their gains cross the 0% threshold ($48,350 for single filers in 2025), but only a fraction of them land in the 15% bracket.

The 0% bracket: why variable-income earners often qualify

The IRS 0% long-term capital gains rate applies to single filers with taxable income up to $48,350 in 2025 ($96,700 for married filing jointly). For W-2 workers with fixed salaries, this bracket is often out of reach. But freelancers, contractors, and self-employed investors can manipulate their taxable income more directly — through pre-tax retirement contributions, business deductions, and timing decisions — making it possible to harvest gains in low-income years at 0%.

A Solo 401k contribution reduces ordinary income directly, which can create space in the 0% LTCG bracket that didn't previously exist. If your ordinary income before retirement contributions is $72,000 (above the $48,350 threshold), contributing $25,000 to a Solo 401k brings your ordinary income to $47,000 — putting the first $1,350 of long-term gains at 0%.

The 15% and 20% brackets

Most investors who owe capital gains tax pay at 15%. The 20% rate only applies to gains that push total income above $533,400 (single) or $600,050 (married, 2025). Unless you're selling a large concentrated position in a high-income year, the 20% bracket is rarely relevant. The bigger surprise for high earners is the Net Investment Income Tax.

The NIIT: the rate that surprises high earners

The 3.8% Net Investment Income Tax (NIIT) applies to investment income — including long-term and short-term capital gains — for filers with modified AGI above $200,000 (single) or $250,000 (married). It's applied to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. This means a single filer with $210,000 in income and $15,000 in gains pays 3.8% on the $10,000 that exceeds $200K, not the full $15,000. The NIIT is a surtax on top of the regular LTCG rate — so gains that would otherwise be taxed at 15% become effectively 18.8%.

Short-term vs. long-term: the one-year rule

Gains on assets held one year or less are short-term capital gains, taxed as ordinary income — at the same rate as your W-2 wages or self-employment profit. There is no preferential rate. For a freelancer in the 22% federal bracket, selling stock after 364 days costs the same as W-2 income. Waiting one day longer to cross the one-year threshold converts that gain to long-term, potentially cutting the rate from 22% to 15% — or to 0% if income is low enough.

Tax-loss harvesting and gain timing

Capital losses offset capital gains dollar-for-dollar. If you have $10,000 in gains and $3,000 in realized losses, you only owe tax on $7,000. Losses in excess of gains can offset up to $3,000 per year of ordinary income, with the remainder carried forward. For self-employed investors, December is the time to review: if you have large gains, harvesting losses in the same tax year reduces the bill without selling assets you want to hold long-term (though the wash-sale rule prevents buying the same security back within 30 days).

If you have rental property with accumulated depreciation, note that the gain on sale is not all treated the same way — depreciation recapture is taxed at a maximum 25% rate, separate from the standard LTCG rates. Use the rental property depreciation calculator to see how much accumulated depreciation your property has and what the recapture exposure looks like before you sell.

Rate thresholds reference 2025 IRS figures for long-term capital gains. NIIT thresholds are not inflation-adjusted. Calculations are federal only and do not include state capital gains tax, which varies significantly by state. Consult a tax professional for personalized advice.