The capital gains tax on equity is the federal tax you pay when you sell stock, fund shares, or similar investments for more than you paid, and the rate turns almost entirely on how long you owned the shares before selling. Hold for one year or less and the profit is taxed as ordinary income, at rates as high as 37% in 2026. Hold for more than one year and the profit falls into a preferential schedule of 0%, 15%, or 20% based on your taxable income. High earners may owe an additional 3.8% on top.
The One-Year Line That Sets Your Rate
Federal law draws a bright line at one year. Sell equity you held for one year or less, and any profit is a short-term capital gain taxed alongside your wages. Hold for more than one year, and the profit qualifies as a long-term capital gain under the lower rate schedule.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The holding period starts the day after you buy and runs through the day you sell. A stock purchased on March 1, 2025, and sold on March 1, 2026, has been held for exactly one year and still falls under short-term treatment. You would need to wait until March 2 to cross into long-term territory. The calculation uses trade dates, not settlement dates.
None of this applies while you simply hold the shares. A position that has doubled but hasn’t been sold is an unrealized gain and produces no tax. The taxable event happens when you sell, exchange, or otherwise dispose of the shares.
2026 Long-Term Capital Gains Rates
Long-term gains fall into one of three tiers: 0%, 15%, or 20%. Which tier applies depends on your total taxable income and filing status. For tax year 2026, the breakpoints are:2Internal Revenue Service. Rev. Proc. 2025-32
- 0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% rate: taxable income above those amounts up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
- 20% rate: taxable income above the 15% ceiling.
These rates apply only to the net long-term gain, and only to the portion sitting in each bracket. If your ordinary taxable income is $40,000 as a single filer and you have a $20,000 long-term gain, the first $9,450 of that gain fills the 0% bracket and the remaining $10,550 is taxed at 15%. Investors whose income lands in the 0% band sometimes time sales deliberately to keep gains inside it.
2026 Short-Term Rates and the Cost of Selling Early
Short-term gains get no preferential treatment. They stack on top of your other ordinary income and are taxed at your marginal rate. The 2026 ordinary income brackets are:3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 10%: up to $12,400 (single) or $24,800 (joint).
- 12%: up to $50,400 (single) or $100,800 (joint).
- 22%: up to $105,700 (single) or $211,400 (joint).
- 24%: up to $201,775 (single) or $403,550 (joint).
- 32%: up to $256,225 (single) or $512,450 (joint).
- 35%: up to $640,600 (single) or $768,700 (joint).
- 37%: above those amounts.
The gap between the two schedules is real money. A single filer earning $100,000 who sells stock at a $10,000 profit pays 15% on that gain if it’s long-term, but 24% if it’s short-term. That’s a $900 difference in federal tax on the same $10,000, decided by the calendar.
Figuring the Gain You Actually Owe Tax On
Your taxable gain is the sale price minus your cost basis, minus selling expenses. The cost basis starts with what you paid for the shares, including brokerage commissions and transfer fees.4Internal Revenue Service. Topic No. 703, Basis of Assets Several events can change that basis:
- Reinvested dividends. Each reinvestment is a separate purchase with its own basis and holding period. Years of quarterly reinvestments can produce dozens of small lots.
- Stock splits. A 2-for-1 split cuts your per-share basis in half but leaves your total basis unchanged.
- Corporate reorganizations. Mergers and spin-offs may require you to allocate your original basis across the resulting shares.
Subtract selling costs like brokerage fees from the proceeds. The difference between your net proceeds and adjusted basis is the gain or loss you report. Sell for less than your basis and you have a capital loss.
Most brokerages now report cost basis to the IRS on Form 1099-B, but the figures are not always right, especially for shares acquired before 2012 or transferred between firms. Keeping your own records of purchase dates and prices is the only reliable safeguard.
Using Losses to Offset Gains
Capital losses reduce capital gains dollar for dollar. Short-term losses first offset short-term gains, and long-term losses first offset long-term gains. Any remaining losses then cross over to offset gains in the other category.
If your total losses exceed your total gains for the year, you can deduct up to $3,000 of the excess against ordinary income, or $1,500 if married filing separately.5Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses Losses beyond that carry forward to future tax years indefinitely under the same netting rules. There is no expiration date on a capital loss carryforward, which makes it worth tracking carefully across returns.
The Wash Sale Rule
The IRS will not let you claim a loss if you buy back substantially identical stock or securities within 30 days before or after the sale. That 61-day window (30 days on each side plus the sale date itself) is the wash sale rule, and it catches many investors who have automatic dividend reinvestment turned on.6Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities
A wash sale does not destroy the loss permanently. The disallowed amount is added to the basis of the replacement shares, so you eventually recognize it when you sell those shares. But if you were counting on that loss to offset a gain this year, a wash sale can wreck the plan.
The 3.8% Surtax on High Earners
The Net Investment Income Tax adds 3.8% on top of the regular capital gains rate for higher-income taxpayers. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the applicable threshold.7Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
- Single filers: $200,000.
- Married filing jointly: $250,000.
- Married filing separately: $125,000.
These thresholds are not indexed for inflation, so more taxpayers have been caught each year since the tax took effect in 2013. For most people without foreign income adjustments, modified adjusted gross income matches the adjusted gross income on your return.8Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
A single filer with $600,000 in taxable income selling long-term equity would pay 20% plus 3.8%, an effective federal rate of 23.8% on those gains. The surtax is reported on Form 8960.
Inherited and Gifted Shares Follow Different Rules
How you acquired the equity changes the tax math. Inherited shares and gifted shares work almost opposite ways.
Inherited Stock
When you inherit equity, your basis resets to the fair market value on the date of the decedent’s death.9Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent This stepped-up basis erases the appreciation that built up during the decedent’s lifetime. If a parent bought stock for $10,000 decades ago and it was worth $200,000 at death, your basis is $200,000. Sell it for $205,000 and your taxable gain is only $5,000. Inherited shares are also automatically treated as long-term, regardless of how briefly the decedent or you held them.10Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
Gifted Stock
Equity received as a gift during the donor’s lifetime carries over the donor’s original basis. If the stock’s fair market value at the time of the gift was equal to or greater than the donor’s basis, you step into the donor’s position, basis and holding period alike.11Internal Revenue Service. Property (Basis, Sale of Home, Etc.)
When the market value at the time of the gift is below the donor’s basis, the rules split. You use the donor’s basis to figure a gain but the lower market value to figure a loss. If neither calculation produces a gain or loss, the result is zero. Any gift tax the donor paid on the net appreciation can also increase your basis.
Qualified Small Business Stock
Founders and early investors in small C corporations may exclude some or all of their gain under Section 1202. For stock originally issued after September 27, 2010, and on or before July 4, 2025, the exclusion can reach 100% of the gain when the shares were held for more than five years.12Office of the Law Revision Counsel. 26 U.S. Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
To qualify, the issuer must be a domestic C corporation with no more than $75 million in gross assets when the stock was issued and must have used at least 80% of its assets in an active trade or business. Financial services, hospitality, and reputation-based professional services are among the industries excluded.
For stock issued after July 4, 2025, a tiered exclusion applies: 50% after three years, 75% after four years, and 100% after five years or more. The per-issuer gain cap increased to the greater of $15 million (indexed for inflation) or ten times the adjusted basis of the stock disposed of.
State Taxes Sit on Top
Federal rates are only part of the picture. Most states tax capital gains as ordinary income, and rates run from zero in states with no income tax to above 10% in the highest-tax states. Some states have added separate surcharges on high-income capital gains. Combined federal and state rates on a long-term equity sale can exceed 30% for high earners in the most expensive jurisdictions, which often surprises investors who have only been running the federal numbers.