Capital Gains Tax for High Income Earners: Rates and Exclusions

If you’re a high earner, the ceiling on federal long-term capital gains tax is 23.8%: the 20% top bracket plus the 3.8% Net Investment Income Tax. Capital gains tax for high income earners turns on where your taxable income and modified adjusted gross income fall against several separate thresholds, plus a handful of special rates and exclusions that can move the real bill up or down by a lot. For tax year 2026, the 20% rate starts once taxable income passes $545,500 for single filers or $613,700 for married couples filing jointly.¹

Where the 20% Rate Starts

Long-term capital gains — profits on assets held more than one year — are taxed at 0%, 15%, or 20% depending on taxable income after deductions.² For 2026, the 20% bracket begins at:¹

$545,500 for single filers
$613,700 for married filing jointly
$579,600 for head of household

The 20% rate is marginal, not a flat rate on all of your gains. A single filer with $540,000 in taxable income pays 15% on every dollar of long-term gain; only the portion pushing income above $545,500 gets the 20% rate. These thresholds also apply to qualified dividends under 26 U.S.C. § 1(h).³

The 3.8% Net Investment Income Tax

Layered on top of the regular rates, the NIIT adds 3.8% to investment income for taxpayers over the following modified adjusted gross income lines:⁴

$200,000 for single or head of household
$250,000 for married filing jointly
$125,000 for married filing separately

The tax hits the lesser of your net investment income or the amount your MAGI exceeds the threshold. These dollar amounts were set in 2013 and are not indexed for inflation, so more taxpayers cross them every year.⁵

Net investment income includes interest, dividends, capital gains, rental and royalty income, and passive business income. It does not include wages, Social Security, unemployment, or distributions from qualified retirement plans.⁶

MAGI for NIIT purposes starts with adjusted gross income and adds back the foreign earned income exclusion, the foreign housing exclusion or deduction, and income excluded by residents of American Samoa or Puerto Rico.⁷ Taxpayers working abroad sometimes assume excluded foreign income won’t count toward the NIIT threshold; the add-back makes sure it does.

When the 20% rate and the NIIT both apply, the effective federal rate on long-term gains is 23.8%. State income taxes stack on top and range from 0% in states with no income tax to over 13% in the highest-tax states.

Higher Rates on Collectibles and Depreciated Real Estate

Two categories of asset don’t get the 20% ceiling.

Collectibles: Up to 28%

Gains on collectibles held more than one year face a maximum rate of 28%. The statute pulls its definition from 26 U.S.C. § 408(m) and covers artwork, antiques, rugs, gold and other metals, gems, stamps, coins, and certain other tangible personal property.³ The 28% is a cap: if your ordinary rate is lower, you pay the ordinary rate. Add the NIIT and the effective federal ceiling reaches 31.8%.

Depreciation Recapture: Up to 25%

When you sell rental or investment real estate you’ve been depreciating, the portion of the gain equal to prior depreciation deductions — unrecaptured Section 1250 gain — is taxed at up to 25%. Gain beyond that follows the ordinary 0/15/20% long-term structure. With the NIIT, the recapture portion can reach 28.8% federal.

Exclusions That Remove Gain From Tax

Sale of a Primary Home

You can exclude up to $250,000 of gain on the sale of your main home as a single filer, or $500,000 as a married couple filing jointly, if you owned and used the home as your primary residence for at least two of the five years before the sale. The two years don’t have to be consecutive, and the exclusion is available once every two years. For married couples, both spouses must meet the use test but only one must meet the ownership test.⁸ Gain above the excluded amount is taxed at your applicable long-term rate, and the NIIT applies to the taxable portion.

Qualified Small Business Stock

Section 1202 allows up to 100% of the gain from qualified small business stock to be excluded from federal income tax. The issuer must be a domestic C corporation whose gross assets did not exceed $75 million at the time the stock was issued, and you must hold the stock for more than five years. The maximum excludable gain per issuer is the greater of $10 million or ten times your adjusted basis in that company’s stock.⁹ Stock held at least three years qualifies for a 50% exclusion, four years for 75%, and five years for the full 100%. Excluded gain escapes both the capital gains rate and the NIIT.

Offsetting Gains With Losses

Capital losses offset capital gains dollar-for-dollar: short-term against short-term, long-term against long-term. Any net loss beyond that can offset up to $3,000 of ordinary income per year ($1,500 married filing separately). Unused losses carry forward indefinitely.² The main value at high incomes is the offset against other gains: a $200,000 gain paired with a $150,000 loss in the same year leaves $50,000 of net gain to tax.

The wash sale rule limits harvesting. Sell a security at a loss and buy a substantially identical security within 30 days before or after the sale, and the loss is disallowed for the current year; it’s added to the basis of the replacement instead.¹⁰ Buying a similar-but-not-identical fund (an S&P 500 fund replaced by a total market fund, for example) is how most investors keep exposure without triggering the rule.

Estimated Payments After a Big Gain

Realizing a large gain mid-year usually creates a quarterly estimated tax obligation. If you’ll owe more than $1,000 above what’s been withheld, the IRS expects payment in the quarter the income was earned, not in April.¹¹

You avoid an underpayment penalty by paying the lesser of 90% of the current year’s tax or 100% of last year’s tax. The rule high earners miss: if your prior-year AGI exceeded $150,000 ($75,000 if married filing separately), that second safe harbor rises to 110% of last year’s tax.¹²

If your income was lumpy — quiet early quarters and a large gain in Q3 — the annualized income installment method on Schedule AI of Form 2210 lets you base each quarter’s required payment on income actually earned in that period. Without it, the IRS assumes even income and may assess a penalty for earlier quarters even if you paid the full amount promptly after the sale.

Deferring or Eliminating the Gain Entirely

Like-Kind Exchanges of Real Property

Under Section 1031, you can swap one investment or business real property for another of like kind and defer all capital gains tax. Since 2018, only real property qualifies; equipment, vehicles, artwork, and other personal property are out.¹³ Strict identification and completion timelines apply, and any cash or non-like-kind property received (called boot) is taxable.

Step-Up in Basis at Death

When an owner dies, heirs receive appreciated assets with a cost basis equal to fair market value on the date of death, wiping out the unrealized gain that built up during the decedent’s lifetime.¹⁴ Stock bought for $50,000 and worth $500,000 at death passes to the heir with a $500,000 basis; sold immediately, the $450,000 of built-in gain never gets taxed. Combined with a 1031 exchange strategy held to death, the deferred gain across decades of property swaps can be eliminated entirely.

Filing the Return

Individual transactions go on Form 8949, where you reconcile the cost basis your broker reported on Form 1099-B against your actual basis.¹⁵ Basis mismatches are common for stock received through employee compensation, gifts, or inheritance — the broker often doesn’t have the right number.

Totals flow from Form 8949 to Schedule D of Form 1040, which computes net gain or loss for the year.¹⁶ If you owe the NIIT, Form 8960 computes the 3.8% surtax separately.⁶ All of these are due with your regular return by the April deadline, and if estimated payments and withholding haven’t already covered the liability, the balance is due then too. Reviewing withholding and estimated payments before year-end is easier than fixing it in April.

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
4
Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax
5
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
6
Internal Revenue Service. Instructions for Form 8960
7
Internal Revenue Service. Modified Adjusted Gross Income
8
Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence
9
Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock
10
Office of the Law Revision Counsel. 26 US Code 1091 – Loss From Wash Sales of Stock or Securities
11
Internal Revenue Service. Estimated Taxes
12
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
13
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
14
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
15
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
16
Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses