IRC §1(h) provides special federal rates for net capital gain. For Hilo, Hawaii taxpayers, the rule applies to federal taxable income; Hawaii has its own income-tax rules and does not simply copy the federal capital-gain calculation.
What income qualifies?
Net capital gain generally starts with long-term capital gains (assets held more than one year), reduced by allowable capital losses and short-term losses under the Schedule D ordering rules. Short-term gains are generally taxed at ordinary income rates. Qualified dividends are included in the preferential-rate computation, even though they are not capital gains.
2025 federal §1(h) thresholds
| Filing status | 0% rate up to | 15% rate up to | 20% above |
|---|---|---|---|
| Single / other individuals | $48,350 | $533,400 | $533,401 |
| Married filing jointly / surviving spouse | $96,700 | $600,050 | $600,051 |
| Married filing separately | $48,350 | $300,000 | $300,001 |
| Head of household | $64,750 | $566,700 | $566,701 |
| Estates and trusts | $3,250 | $15,900 | $15,901 |
These are taxable-income thresholds, not sale-price thresholds. The 0%, 15%, and 20% rates apply to the portion of net capital gain in each layer. Collectibles gain can be taxed up to 28%, and unrecaptured §1250 gain up to 25%.
Hilo example
A single Hilo taxpayer has $40,000 of ordinary taxable income and $20,000 of net long-term capital gain in 2025. The capital gain stacks on top of ordinary income: total taxable income is $60,000. Because the taxpayer’s income crosses the $48,350 0% threshold, part of the gain may receive the 0% rate and the remainder may fall in the 15% layer. The Qualified Dividends and Capital Gain Tax Worksheet or Schedule D Tax Worksheet calculates the exact result.
Losses and reporting
Capital losses first offset capital gains. If losses exceed gains, individuals generally may deduct up to $3,000 ($1,500 if married filing separately) against other income and carry the unused balance forward. Report sales on Form 8949 and Schedule D unless an exception applies; retain purchase records, basis adjustments, and 1099-B statements.
Hawaii is separate
Section 1(h) controls federal tax only. Hawaii may tax gains under its own rates, deductions, and residency rules. Complete the Hawaii return separately and check current Department of Taxation instructions for basis, carryovers, and filing requirements.
Bottom line
IRC §1(h) can reduce federal tax on eligible long-term gains, but the rate depends on filing status, total taxable income, gain type, and losses. This educational article uses 2025 thresholds; verify current IRS and Hawaii guidance before filing.
