Capital Gains 2025: Qualify for the 0% Rate (Complete Guide)

When it comes to investing, few areas are as misunderstood or as full of opportunity as the way the IRS taxes long-term capital gains and dividends. You may know that the government gives these types of investment income lower "preferential" tax rates compared to wages, but what most investors don’t realize is that the order in which income is stacked makes all the difference.

With proper planning, you can strategically unlock the 0% long-term capital gains bracket and, in some cases, sell investments for a profit while paying nothing in federal taxes. In this article, we’ll walk through how the rules work, give examples at different income levels, explain how dividends fit in, and share planning strategies to maximize your after-tax wealth.

The IRS splits taxable income into two broad categories:

• Ordinary income: Wages, business income, self-employment earnings, retirement distributions, taxable interest, rental income, and non-qualified dividends. These are taxed using the ordinary brackets (10% to 37%).
• Preferential income: Long-term capital gains (from assets held more than a year) and qualified dividends. These are taxed at the lower rates of 0%, 15%, or 20%, depending on your taxable income.

Here are the official IRS thresholds for 2025:

• Married couple, age 67, retired
• Social Security + pension = $50,000
• Long-term capital gains = $30,000
• Standard deduction = $31,200

Taxable ordinary income = $18,800
Preferential income (gains) = $30,000
Total taxable income = $48,800

Since the 0% bracket extends to $96,700, all $30,000 of gains are taxed at 0%. This couple can sell appreciated stock and "reset" their basis, potentially saving thousands in future taxes.

• Married couple, both working
• Wages = $90,000
• Long-term capital gains = $50,000
• Standard deduction = $31,200

Taxable ordinary income = $58,800
Preferential income = $50,000
Total taxable income = $108,800

• The $58,800 of wages already eats up part of the 0% bracket.
• That leaves $37,900 of "room."
• So $37,900 of their gains are taxed at 0%.
• The remaining $12,100 is taxed at a rate of 15%.

Result: Their effective tax rate on $50,000 of gains is just 3.6%.

• Single filer, technology executive
• Salary = $300,000
• Long-term capital gains = $100,000
• Standard deduction = $15,600

Taxable ordinary income = $284,400
Preferential income = $100,000
Total taxable income = $384,400

Here’s what happens:

• Ordinary income has already surpassed the $48,350 0% cutoff.
• Therefore, all $100,000 of gains fall into the 15% bracket.

• Married couple with portfolio income
• Wages = $70,000
• Qualified dividends = $10,000
• Long-term capital gains = $20,000
• Standard deduction = $31,200

Taxable ordinary income = $38,800
Preferential income = $30,000 (dividends + gains)
Total taxable income = $68,800

Since they’re still under the $96,700 joint 0% cutoff, all $30,000 of dividends and gains are taxed at 0%.

Understanding how brackets "stack" unlocks several powerful strategies:

In low-income years (such as early retirement, sabbaticals, or business transition years), you can intentionally sell appreciated assets, pay no tax, and reset the cost basis to a higher amount.

Structuring portfolios for qualified dividends (rather than ordinary income distributions) can dramatically reduce annual tax drag.

In years when ordinary income is low, you might fill lower ordinary brackets with Roth conversions while still leaving room for 0% capital gains. This is advanced, but highly effective planning.

Selling a business, exercising stock options, or taking large retirement distributions can crowd out the 0% bracket. Careful timing across tax years can save tens of thousands.

For high earners, strategies like shifting income, investing through tax-efficient accounts, or offsetting gains with losses (tax-loss harvesting) can avoid or reduce the 3.8% surtax.

Do all taxpayers benefit from the 0% rate?
Yes. Technically, every taxpayer has access to the 0% bracket. But high earners usually see it "used up" by their wages and ordinary income before capital gains are considered.

Are qualified dividends always better?
Yes. Qualified dividends are taxed at preferential rates (0%, 15%, 20%) instead of ordinary income rates (up to 37%). However, eligibility rules apply, such as holding period requirements.

How do capital gains interact with Social Security taxation?
Realizing gains can increase provisional income, which may cause more of your Social Security benefits to become taxable. This is another reason to model carefully.

What about short-term capital gains?
Short-term gains (on assets held one year or less) are taxed as ordinary income. They do not get the 0% / 15% / 20% treatment.

Long-term capital gains and qualified dividends are among the most tax-favored types of income in the U.S. system. However, the real planning magic lies in understanding how they stack up against ordinary income.

With the right strategy, you can:

• Harvest gains tax-free in low-income years
• Optimize portfolios for qualified dividends
• Coordinate income events to stay in lower brackets
• Reduce exposure to the 3.8% NIIT