5.5 Capital Gains Tax Rates (0%, 15%, 20%)

Understanding capital gains tax rates is essential for the EA exam and effective tax planning. The tax code provides preferential rates for long-term capital gains—assets held more than one year—while short-term gains are taxed at ordinary income rates.

---

2025 Long-Term Capital Gains Rate Brackets

Long-term capital gains are taxed at three preferential rates: 0%, 15%, or 20%. The rate depends on your taxable income (not just the gain amount) and filing status.

2025 Long-Term Capital Gains Thresholds

Key insight: These brackets are based on total taxable income, not just capital gains. This means your wages, business income, and other ordinary income affect which capital gains rate applies.

---

Short-Term vs. Long-Term: A Direct Comparison

The holding period determines whether you receive preferential treatment:

Example: A taxpayer in the 35% ordinary income bracket sells stock held for 13 months with a $50,000 gain. As a long-term gain, they pay 15% ($7,500) instead of 35% ($17,500)—a $10,000 tax savings simply from holding 13 months instead of 11.

---

Qualified Dividends: Same Preferential Rates

Qualified dividends receive the same favorable tax treatment as long-term capital gains. To qualify, dividends must meet two requirements:

Requirements for Qualified Dividend Treatment

1. Paid by a qualified corporation:

   • U.S. corporations
   • Foreign corporations in U.S. treaty countries
   • Foreign corporations whose stock is readily tradable on U.S. exchanges

2. Holding period requirement:

   • You must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date
   • For preferred stock, the requirement is more than 90 days during a 181-day period

Dividends That Do NOT Qualify

• Dividends from tax-exempt organizations
• Dividends on employee stock ownership plan (ESOP) shares
• Dividends from real estate investment trusts (REITs)
• Dividends from mutual funds attributable to short-term gains or interest
• Dividends paid on securities you lent out

Practical application: Most dividends from major U.S. companies and index funds qualify for preferential rates. Review your Form 1099-DIV—qualified dividends appear in Box 1b.

---

Net Investment Income Tax (NIIT): The Additional 3.8%

High-income taxpayers face an additional 3.8% surtax on net investment income under IRC Section 1411. This tax was enacted as part of the Affordable Care Act and applies starting in 2013.

2025 NIIT Thresholds (Modified AGI)

Critical point: These thresholds are NOT indexed for inflation. They have remained unchanged since 2013, meaning more taxpayers become subject to NIIT each year due to wage growth and inflation.

How NIIT Is Calculated

The NIIT equals 3.8% of the lesser of:

1. Net investment income, OR
2. The excess of MAGI over the threshold

What Counts as Net Investment Income

Included:

• Interest, dividends, and capital gains
• Rental and royalty income
• Non-qualified annuities
• Passive business income

Excluded:

• Wages and self-employment income
• Social Security benefits
• Tax-exempt interest
• Active business income
• Distributions from qualified retirement plans

NIIT Calculation Example

Facts: Rachel (single) has $180,000 in wages and $80,000 in net investment income (capital gains and dividends). Her MAGI is $260,000.

Calculation:

• MAGI exceeding threshold: $260,000 - $200,000 = $60,000
• Net investment income: $80,000
• NIIT applies to the lesser: $60,000
• NIIT owed: $60,000 × 3.8% = $2,280

---

Maximum Effective Tax Rates on Investment Income

When combining regular capital gains rates with NIIT, the maximum effective rates become:

---

Special Capital Gains Rates

Collectibles: Maximum 28% Rate

Long-term gains on collectibles face a maximum rate of 28% rather than the standard 0%/15%/20% structure.

What qualifies as a collectible:

• Art, antiques, and rugs
• Stamps and coins
• Precious metals (gold, silver, platinum bullion)
• Gems and jewelry
• Rare wines and spirits
• Historic objects

How the 28% maximum works: If your ordinary income tax bracket is below 28%, you pay your bracket rate on collectibles gains. The 28% is a ceiling, not a flat rate.

Example: A taxpayer in the 22% bracket sells a coin collection at a $10,000 long-term gain. They pay 22% ($2,200), not 28%. A taxpayer in the 35% bracket pays the maximum 28% ($2,800).

Unrecaptured Section 1250 Gain: Maximum 25% Rate

When you sell depreciable real property at a gain, a portion of that gain may be taxed at 25% rather than standard capital gains rates.

What is unrecaptured Section 1250 gain?

• It equals the lesser of the total gain or the accumulated depreciation taken on the property
• It applies to real property depreciated using the straight-line method (note: under OBBBA, 100% bonus depreciation is restored for qualifying §168(k) property placed in service after January 19, 2025; on those assets, the adjusted basis at sale may be $0 and the entire sales price flows through §1245/§1250 recapture)
• It "recaptures" the tax benefit previously received from depreciation deductions

Example: You purchased a rental building for $500,000 and claimed $150,000 in straight-line depreciation. Your adjusted basis is $350,000. You sell for $600,000.

• Total gain: $600,000 - $350,000 = $250,000
• Unrecaptured Section 1250 gain: $150,000 (the depreciation claimed)
• Taxed at maximum 25%: $150,000 × 25% = $37,500
• Remaining gain ($100,000) taxed at 0%/15%/20% capital gains rates

Section 1202 Qualified Small Business Stock

QSBS gains may be partially or fully excluded. After OBBBA (July 4, 2025), two regimes operate side-by-side—the exam can test either.

Pre-OBBBA (stock acquired on or before July 4, 2025):

• Issuer gross assets ≤ $50 million at issuance
• 5-year hold required for 100% exclusion (50%/75%/100% by acquisition date)
• Per-issuer cap: greater of $10M or 10× basis

OBBBA-expanded (stock acquired AFTER July 4, 2025):

• Issuer gross assets ≤ $75 million at issuance (indexed)
• Tiered hold: 50% at 3 years, 75% at 4 years, 100% at 5 years
• Per-issuer cap: greater of $15M (indexed) or 10× basis

---

EA Exam Tips for Capital Gains Rates

1. Memorize the 2025 thresholds: Know that the 0% rate ends at $48,350 (Single) and $96,700 (MFJ). The 20% rate starts at $533,400 (Single) and $600,050 (MFJ). HoH: 0% to $64,750, 20% above $566,700. MFS: 0% to $48,350, 20% above $300,000.

2. NIIT thresholds are static: Unlike most tax figures, the $200,000/$250,000 NIIT thresholds have never been adjusted for inflation since 2013.

3. Qualified dividends = long-term rates: Remember the 60-day holding period requirement within the 121-day window around the ex-dividend date.

4. Special rates hierarchy: 28% for collectibles, 25% for unrecaptured Section 1250 gain, 0%/15%/20% for everything else.

5. NIIT calculation: Always compare (a) net investment income versus (b) MAGI over threshold—apply 3.8% to the lesser amount.

6. Short-term = ordinary rates: No special calculations needed; short-term gains are simply added to ordinary income.