What's the Difference Between Capital Gains Tax and Ordinary Income Tax?

Ordinary income tax and capital gains tax are two separate rate structures that apply to different types of income. Ordinary income — things like wages, freelance income, and most interest — is taxed at graduated rates ranging from 10% to 37% depending on your total income. Capital gains, which come from selling assets like stocks, real estate, or a business, are taxed at different rates depending on how long you held the asset. Short-term gains on assets held a year or less are taxed at ordinary income rates, but long-term gains on assets held more than a year get the benefit of rates of 0%, 15%, or 20%. Understanding the difference matters because where your income comes from can have a much bigger effect on your tax bill than your total income level alone.