Capital Gains Tax Explained: Rates, Basis, and Losses

Capital gains tax is the federal tax you owe on the profit when you sell property for more than you paid for it. Long-term gains, on assets held more than a year, are taxed at 0%, 15%, or 20% depending on your income. Short-term gains, on assets held a year or less, are taxed as ordinary income at rates up to 37%. What you actually owe depends on the holding period, your cost basis, any losses you can apply against the gain, and whether the asset qualifies for a specific exclusion.

Short-Term or Long-Term: The One-Year Line

Holding period is the first thing to check, because it changes the rate more than anything else. Your holding period starts the day after you acquire the asset and runs through the day you sell it.¹

Hold for one year or less, and the gain is short-term, taxed at your ordinary income rate. Hold for more than one year, and the gain is long-term, taxed at the preferential capital gains rates. A single day can move a sale from one bucket to the other. If you’re sitting on a gain and the anniversary is a few weeks out, that wait is usually worth it.

Federal Capital Gains Tax Rates

Long-term capital gains are taxed at 0%, 15%, or 20% depending on your taxable income and filing status. For 2026, the brackets are:²

0% on taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household.
15% on income above those thresholds up to $545,500 single, $613,700 married filing jointly, $579,600 head of household.
20% on income above the 15% ceilings.

Short-term gains get no preferential treatment. They stack on top of your other income and are taxed at ordinary rates, which for 2026 run from 10% to 37%.² For a single filer at $200,000 in taxable income, that’s the difference between a 15% rate on a long-term sale and up to 32% on a short-term one.

The 3.8% Surtax on High Earners

Capital gains are part of “net investment income,” which triggers an additional 3.8% tax once your modified adjusted gross income clears $200,000 single or $250,000 married filing jointly.³ Those thresholds are not indexed to inflation. Stacked on the 20% long-term rate, the top federal rate on a long-term gain reaches 23.8%.

Collectibles and Depreciated Real Estate

Two categories of long-term gain get their own rates. Profits from selling collectibles, including coins, art, antiques, and precious metals, are taxed at a maximum of 28% (or your ordinary rate, if lower).¹

Investment real estate carries a similar wrinkle. The portion of the gain equal to the depreciation you claimed over the years is taxed at a maximum of 25%, with anything above that taxed at the standard long-term rates.⁴ The years of depreciation deductions come partially back at sale, which is a common surprise for landlords.

Figuring the Gain: Cost Basis

Your gain is the sale price minus your adjusted cost basis. Basis usually starts with what you paid, including brokerage commissions, legal fees, and recording charges. For real estate, you add the cost of permanent improvements such as a new roof, but not routine maintenance. That total is your adjusted basis.

Records are everything. Settlement statements, brokerage confirmations, and receipts for improvements should be kept for as long as you own the asset and beyond. Without documentation, the IRS may treat your basis as zero on audit, which turns the entire sale price into taxable gain.

Inherited and Gifted Property

Inherited property gets a stepped-up basis: it resets to fair market value on the date of the original owner’s death.⁵ Stock a parent bought for $10,000 that was worth $200,000 at their death has a basis of $200,000 in your hands.

Gifts are different. You generally take the donor’s original basis.⁶ Shares your uncle bought for $5,000 and gave you when they were worth $25,000 still have a $5,000 basis. If the fair market value at the time of the gift was below the donor’s basis and you later sell at a loss, the lower gift-date value becomes your basis for that loss calculation.

Stock Splits and Mutual Funds

A stock split is not a taxable event. Your total basis stays the same, spread across more shares. Owning 100 shares at $15 becomes 200 shares at $7.50 after a 2-for-1 split.⁷

Mutual fund shares accumulated over years of reinvested dividends can be tracked using an average cost method: total paid divided by total shares owned.⁸ The election has to be made, and the rules differ for shares acquired before and after 2012. Your fund company can produce the numbers.

Selling Your Home

The primary residence exclusion is the biggest capital gains break most people ever use. You can exclude up to $250,000 of gain on the sale of your main home, or up to $500,000 filing jointly.⁹ Anything above the limit is taxed at the applicable capital gains rate.

To qualify, you must have owned and used the home as your primary residence for at least two of the five years before the sale. For joint filers, one spouse needs to meet the ownership test but both must meet the residency test, and the two years don’t have to be consecutive.¹⁰ The exclusion is available once every two years.¹¹

Sell before hitting two years and a partial exclusion may still apply if the move was driven by a job relocation at least 50 miles farther away, a qualifying health condition, or an unforeseeable event like a natural disaster, divorce, or job loss.¹⁰ The partial exclusion is proportional to the time you actually lived in the home.

Using Losses to Reduce What You Owe

Capital losses offset capital gains dollar for dollar. A $10,000 loss on one sale wipes out a $10,000 gain on another. When losses exceed gains, up to $3,000 of the net loss can be deducted against ordinary income like wages ($1,500 if married filing separately).¹

Anything beyond that $3,000 carries forward to future years indefinitely, subject to the same annual cap.¹² A $30,000 loss can take a decade to absorb, but it never expires. Keep your records for the full carryforward period.

The Wash Sale Rule

Selling a stock at a loss and buying it right back doesn’t produce a deductible loss. The wash sale rule disallows the deduction if you purchase substantially identical securities within 30 days before or after the sale, a 61-day window in total.¹³ The disallowed loss is added to the basis of the replacement shares, so it isn’t lost, only deferred. Year-end tax-loss harvesting is where investors most often trip this rule by reinvesting too fast into the same or a nearly identical fund.

Deferring Tax on Investment Real Estate

A like-kind exchange under Section 1031 lets you sell investment real estate and defer the gain by rolling proceeds into similar real property held for business or investment use. You can’t swap a rental building for a personal vacation home.¹⁴

Since 2018, 1031 treatment applies only to real property. Equipment, vehicles, and artwork no longer qualify. The deadlines are strict: identify potential replacement properties within 45 days of the original sale and close within 180 days. Miss either and the full gain is taxable. Most investors use a qualified intermediary to hold the proceeds, because receiving the funds directly can disqualify the exchange.

Paying the Tax on Time

A large capital gain in the middle of the year can create an estimated tax obligation. If you expect to owe $1,000 or more in federal tax after withholding and credits, the IRS expects quarterly estimated payments rather than a single settlement at filing.¹⁵ Capital gains have no withholding, which is what catches most investors.

Payments are due April 15, June 15, September 15, and January 15 of the following year.¹⁶ You avoid the underpayment penalty by paying at least 90% of the current year’s tax or 100% of the prior year’s tax through withholding and estimated payments combined. Selling a highly appreciated position in September and waiting until April to pay is the classic path to a penalty notice.

State Taxes Are Separate

The federal rate is not the whole bill. Most states tax capital gains as ordinary income, at rates that run from zero in states with no income tax to over 13% at the top. A few states offer preferential treatment for specific kinds of gains, but those are the exceptions. Depending on where you live, your combined federal and state rate on a long-term gain can reach the mid-30s. If a move to a different state is on the table before you sell a large position, the timing matters.

1
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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Internal Revenue Service. Net Investment Income Tax
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Internal Revenue Service. Treasury Decision 8836 – Capital Gains, Installment Sales, Unrecaptured Section 1250 Gain
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Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
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Office of the Law Revision Counsel. 26 US Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
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Internal Revenue Service. Stocks (Options, Splits, Traders) 7
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Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.) 1
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Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
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Internal Revenue Service. Publication 523, Selling Your Home
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Internal Revenue Service. Topic No. 701, Sale of Your Home
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Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040)
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Office of the Law Revision Counsel. 26 US Code 1091 – Loss From Wash Sales of Stock or Securities
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Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
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Internal Revenue Service. Estimated Taxes
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Internal Revenue Service. Individuals 2