U.S. Capital Gains Tax Rate History

For the first eight years of the federal income tax (1913-1921), capital gains were taxed identically to wages. The Revenue Act of 1921 changed that, capping the long-term cap gains rate at 12.5% versus a top ordinary rate of 73%. The argument — then and now — was that locking up capital appreciation at high rates discourages selling, which discourages reallocation, which slows growth. The rate gap has been a fixture of U.S. tax law for 100+ years since.

FDR-era reform replaced the simple 12.5% rate with a complex sliding scale: gains held under one year were taxed at 100% of ordinary, gains held over 10 years at only 30%. The intent was to tax "speculative" trading more heavily than long-term ownership. The structure persisted for almost a decade before being simplified.

The 1942 act simplified cap gains to a flat 25% top rate on assets held over 6 months. That structure — long-term defined by holding period, taxed at a fixed cap — held for almost three decades and is essentially how cap gains still work today.

The Tax Reform Act of 1969 introduced the Alternative Minimum Tax (AMT) and added a "minimum tax preference" on capital gains. TRA76 raised the long-term holding period from 6 months to 12 and tightened cap gains preferences further. By 1976, the effective top long-term cap gains rate reached ~39.875% — the highest in U.S. history (and one of the most-cited reasons for the late-1970s capital flight to tax-advantaged structures).

The Economic Recovery Tax Act of 1981 dropped the top long-term cap gains rate from 28% to 20%. Combined with ERTA's broader bracket cuts and inflation indexing, it was the moment the cap-gains-favored era of the 1980s and 1990s really began.

In a one-time anomaly, the 1986 Tax Reform Act equalized the long-term cap gains rate with ordinary income at 28%. The deal: collapse 14 brackets into 2, kill the shelter industry, and stop pretending capital and labor income deserved different treatment. It lasted just 11 years before Congress restored the gap.

TRA97 restored the cap gains rate cut, dropping the top rate from 28% to 20% and creating a special 18% rate for assets held over 5 years (later repealed). It also created the Roth IRA, raised the home-sale exclusion to $250K/$500K, and expanded the IRA contribution limits.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 cut long-term cap gains to 15% and applied the same rate to qualified dividends. The 15% rate stood as the headline for ten years.

The American Taxpayer Relief Act of 2012 (ATRA) restored the 20% top long-term cap gains rate for the highest earners. Separately, the Affordable Care Act's 3.8% Net Investment Income Tax (NIIT) took effect in 2013 — applying to investment income above $200K (single) or $250K (married). The combination puts the effective top long-term cap gains rate at 23.8%, where it has stood since.