In the United States, capital gains tax is a critical concept for investors dealing with stocks and cryptocurrencies. As digital assets grow in popularity and retail stock investing becomes more mainstream, understanding how the IRS treats these profits is essential. Whether you’re a full-time trader or a long-term investor, failing to understand capital gains tax laws can lead to costly mistakes. This post will guide you through the fundamentals, rates, exemptions, and best strategies to handle capital gains taxes on both stocks and crypto in 2025.
What Is Capital Gains Tax?
Capital gains tax is the tax you pay on the profit you make when you sell an asset for more than what you paid for it. In the U.S., this applies to assets such as real estate, stocks, mutual funds, exchange-traded funds, and cryptocurrencies. When you dispose of these assets—whether by selling, exchanging, or using them in certain types of transactions—you trigger a taxable event.
Short-Term vs Long-Term Capital Gains
The U.S. tax system differentiates between short-term and long-term capital gains. This classification directly impacts the tax rate you’ll owe. Short-term capital gains occur when you sell an asset that you held for one year or less. These gains are taxed as ordinary income based on your federal income tax bracket. On the other hand, long-term capital gains apply when you hold the asset for more than one year before selling. These gains benefit from preferential tax rates, typically lower than your ordinary income rate.
Capital Gains Tax Rates for 2025
As of 2025, the IRS maintains a tiered structure for long-term capital gains based on income levels. If your taxable income is below a certain threshold, your long-term gains may be taxed at 0%. For middle-income earners, the rate is usually 15%. High-income earners face a 20% rate. Short-term capital gains follow your regular federal tax brackets, which range from 10% to 37% depending on your income level.
How Capital Gains Apply to Stocks
When you invest in stocks and later sell them for a higher price, the difference between the purchase and sale price is your capital gain. If the sale occurs within one year of purchase, it’s considered short-term. If it happens after more than one year, it’s classified as a long-term gain.
For example, if you bought shares of Apple for $5,000 in January and sold them for $7,000 in June, your $2,000 gain is short-term and will be taxed as regular income. If you sold those same shares in the following year, your $2,000 profit would qualify for the more favorable long-term rate.
Using Tax-Advantaged Accounts for Stocks
To reduce or eliminate capital gains taxes on stock investments, many Americans use tax-advantaged accounts like Roth IRAs or traditional 401(k) plans. Gains inside a Roth IRA are tax-free if qualified, while gains inside a traditional IRA or 401(k) grow tax-deferred. These accounts allow you to invest without worrying about immediate tax consequences.
Capital Gains Tax and Cryptocurrency
The IRS treats cryptocurrencies as property, not currency. That means every time you sell, trade, or use cryptocurrency for goods or services, you trigger a capital gain or loss. If you bought Bitcoin at $10,000 and sold it at $30,000, your $20,000 profit is a taxable capital gain. If you exchanged Ethereum for another token, that too counts as a taxable event.
Crypto gains are taxed similarly to stocks. If held for less than one year, they’re short-term and taxed as ordinary income. If held for more than one year, they’re long-term and qualify for the lower capital gains rate.
Tracking Crypto Transactions
Keeping records of your crypto transactions is crucial. Because crypto trading often happens across multiple wallets and exchanges, it’s your responsibility to document purchase prices, sale prices, dates, and amounts. Several software platforms, such as Koinly, CoinTracker, and TokenTax, help you track and report crypto taxes automatically. Without good records, you risk IRS penalties or misreporting income.
Crypto-to-Crypto Swaps Are Taxable
One common misunderstanding among crypto users is that swapping one coin for another is not taxable. In reality, exchanging Bitcoin for Ethereum or Solana counts as a sale of Bitcoin, and the difference between the price you paid and the value at the time of exchange is considered a capital gain or loss.
Using Crypto for Purchases Triggers Taxes
Even using crypto to buy something as simple as coffee is a taxable event. If the market value of the crypto at the time of purchase is greater than what you originally paid, you have a capital gain. This makes crypto payments complex from a tax perspective, even though they are becoming more common in the U.S.
Capital Losses and Offsetting Gains
If you sell an asset at a loss, that’s called a capital loss. The IRS allows you to use capital losses to offset capital gains. For instance, if you made $5,000 in gains but lost $2,000 on another asset, you’ll only be taxed on the $3,000 net gain. If your losses exceed your gains, you can deduct up to $3,000 in capital losses from your ordinary income per year. Any unused losses can be carried forward to future years.
Tax-Loss Harvesting for Year-End Planning
Many investors engage in tax-loss harvesting near the end of the year. This involves selling losing investments to offset taxable gains from winners. In the crypto world, where the wash sale rule currently doesn’t apply (as of 2025), you can sell crypto at a loss and immediately buy it back—capturing the loss for tax purposes while still holding the asset. This strategy can significantly reduce your taxable income if done correctly.
State-Level Capital Gains Taxes
In addition to federal capital gains taxes, many U.S. states also tax investment profits. States like California, New York, and Oregon treat capital gains as ordinary income, meaning you could pay over 10% more in taxes depending on where you live. However, states like Florida, Texas, and Nevada have no income tax and therefore no state capital gains tax.
Capital Gains Reporting with IRS Form 8949 and Schedule D
To report capital gains and losses, you’ll use IRS Form 8949 to list each individual transaction. These figures are then totaled and transferred to Schedule D of your tax return. Cryptocurrency platforms like Coinbase may issue a 1099 form, but it is still your responsibility to ensure accuracy. For stock investors, brokerage firms provide detailed 1099-B forms that summarize gains and losses.
Avoiding IRS Penalties
Failure to report capital gains properly can result in IRS penalties, interest, or audits. Make sure to keep detailed records, consult with a tax professional if needed, and use reliable tax software. Filing accurately and on time helps you avoid unnecessary scrutiny from the IRS.
Final Thoughts
Capital gains tax plays a significant role in managing your investments, whether you’re in stocks, ETFs, or cryptocurrencies. In 2025, the IRS is taking crypto taxation more seriously than ever, and stock investors are still expected to report all transactions clearly. By understanding the rules around short- and long-term gains, using tax-loss harvesting, keeping good records, and exploring tax-advantaged accounts, U.S. investors can keep more of their profits legally.
