The capital gains tax on shares depends on two things: how long you owned the stock and how much income you have. Profits on shares held longer than one year are taxed at long-term rates of 0%, 15%, or 20%. Profits on shares held a year or less are taxed as ordinary income, which for 2026 runs as high as 37%.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 High earners pay another 3.8% on top.
How the Holding Period Works
Federal law draws the line at one year. Shares held for more than twelve months produce long-term gains; shares held twelve months or less produce short-term gains.2Office of the Law Revision Counsel. 26 U.S. Code 1222 – Other Terms Relating to Capital Gains and Losses The clock starts the day after you buy and includes the day you sell.
So if you bought on March 1, 2025, selling on March 1, 2026, still counts as short-term. You’d have to wait until March 2, 2026, for the gain to qualify as long-term. One day of patience can move a large sale from the ordinary-income column into the preferential column, which is why purchase dates are worth tracking carefully, especially across multiple lots of the same stock.
Calculating the Gain
Your capital gain is your net sale proceeds minus your adjusted cost basis. Basis starts at what you paid for the shares.3Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property-Cost Add any purchase commissions or fees. On the selling side, subtract commissions and transfer fees from the gross proceeds.
A simple example: 100 shares bought at $50 each with a $10 commission gives you a basis of $5,010. Sell them for $7,500 with a $10 commission, and net proceeds are $7,490. The taxable gain is $2,480.
Inherited Shares
When you inherit stock, your basis is generally the fair market value on the date the original owner died, not what they paid.4Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This stepped-up basis can wipe out decades of built-in gain. Shares your grandmother bought for $2,000 that were worth $50,000 the day she died give you a $50,000 basis. Sell them at $52,000, and only $2,000 is taxable.
Gifted Shares
Shares received as a gift come with a carryover basis: your basis is the donor’s original basis.5Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust There’s a twist if the stock was worth less than the donor’s basis on the date of the gift. In that case, if you later sell at a price below the fair market value on the gift date, your basis is that lower fair market value. If you sell above the donor’s original basis, you use the donor’s basis. Sell somewhere between the two, and there’s no gain or loss to report.
After a Stock Split
A stock split isn’t a taxable event, but it does change your per-share basis. Total basis stays the same, spread over more shares. A 2-for-1 split of 100 shares with a $5,000 basis leaves you with 200 shares at $25 each.6Internal Revenue Service. Stocks (Options, Splits, Traders) Brokers usually handle this automatically for shares bought after 2011.
Choosing Which Lot to Sell
If you bought the same stock in multiple purchases at different prices, the shares you pick to sell can change your tax bill significantly. The IRS allows specific identification as long as you document the choice.7Internal Revenue Service. Publication 551 (12/2025), Basis of Assets Without a specific selection, the default is first-in, first-out: your oldest shares go first.
Selling your highest-cost shares first shrinks the taxable gain. Selling shares held over a year first locks in the long-term rate. Most brokerages let you pick lots at the moment of the trade through their online platform, and the choice shows up on your 1099-B. Make the election at or before the sale, not after.
2026 Long-Term Capital Gains Rates
Short-term gains stack on top of your wages and are taxed at the ordinary rates of 10% through 37%. A large short-term gain can push you into a higher bracket.
Long-term rates for 2026 are based on taxable income after deductions:8Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
- 0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% rate: taxable income from $49,451 to $545,500 (single), $98,901 to $613,700 (joint), or $66,201 to $579,600 (head of household).
- 20% rate: taxable income above $545,500 (single), $613,700 (joint), or $579,600 (head of household).
Most individual investors fall in the 15% band. The 0% rate is worth planning around in a low-income year, such as early retirement or a gap between jobs; you can potentially sell appreciated shares and owe nothing on the gain.
The 3.8% Net Investment Income Tax
Higher earners pay an extra 3.8% surtax on investment income, including capital gains. The Net Investment Income Tax applies when modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).9Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax It hits the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.10Internal Revenue Service. Net Investment Income Tax
These thresholds are written into the statute and don’t adjust for inflation, so more taxpayers cross them each year. Stacked on the 20% long-term rate, the top federal rate on long-term gains reaches 23.8%. On short-term gains, the combined federal rate can top 40%.
Offsetting Gains With Losses
Losses on other stock sales offset your gains dollar for dollar. Short-term losses first offset short-term gains; long-term losses first offset long-term gains. Any leftover losses then cross over to the other category. Lose $8,000 on one stock and gain $8,000 on another, and your net capital gain is zero.
When total losses exceed 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.11Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses Anything beyond that carries forward indefinitely to future years, keeping its short-term or long-term character.12Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers A $15,000 net loss with no future gains would take five years to use up at $3,000 per year.
The Wash Sale Rule
You can’t sell shares at a loss for the tax deduction and buy the same stock right back. If you purchase substantially identical shares within 30 days before or 30 days after a loss sale, the IRS disallows the loss.13Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The window is 61 days total, and it covers options and contracts to buy the same stock too.
The loss isn’t erased. The disallowed amount gets added to the basis of your replacement shares, deferring the benefit until you eventually sell those.14Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses Sell at a $1,000 loss and repurchase within the window for $4,000, and your new basis becomes $5,000.
Reporting the Sale
Your broker sends Form 1099-B each year showing sale dates, proceeds, and, for shares purchased after 2011, cost basis.15Internal Revenue Service. About Form 1099-B, Proceeds From Broker and Barter Exchange Transactions For older shares the broker didn’t track, you’ll need to rebuild the basis from your own trade confirmations or statements.
Individual sales go on Form 8949 with dates, proceeds, and basis. Those totals flow to Schedule D, which calculates your net gain or loss and carries the final figure to Form 1040.16Internal Revenue Service. Instructions for Form 8949 (2025) If every 1099-B shows basis was reported to the IRS and no adjustments are needed, you can skip Form 8949 and put the totals straight on Schedule D. Most tax software imports the 1099-B and handles the paperwork automatically.
Estimated Payments After a Big Sale
A large capital gain during the year can leave you facing a bill in April plus a penalty for not paying as you went. You generally owe quarterly estimated tax if you expect to owe at least $1,000 after withholding and credits, and your withholding won’t cover 90% of the current year’s tax or 100% of last year’s (110% if your prior-year AGI was over $150,000).17Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
You don’t have to spread the payment evenly across the year if the gain came in one quarter. The IRS lets you annualize your income and make a larger payment in the quarter the gain landed. Another option, if you’re employed, is to bump up federal withholding from your paycheck for the rest of the year; withholding is treated as paid evenly regardless of when it actually happened.18Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc. Waiting until April to settle up can trigger an underpayment penalty even if you eventually pay in full.
State Taxes Are Separate
Federal tax is only part of what you owe. Most states with an income tax treat capital gains as ordinary income, with rates roughly from 1% to over 13%. A handful of states have no income tax. A few tax interest and dividends but exempt capital gains. The state where you live on the last day of the tax year generally taxes the gain, though rules vary. Add your state rate to the federal rate to see what you’ll actually keep.