Capital gains tax reform has been debated in nearly every recent Congress, but the core federal framework has not moved: for 2026, long-term investment profits are still taxed at 0%, 15%, or 20% depending on income, and the basis of appreciated assets still resets to fair market value at death. The reforms that dominate the policy conversation, higher rates on million-dollar earners, taxing unrealized gains at death, indexing basis for inflation, reclassifying carried interest, and applying the wash sale rule to cryptocurrency, remain proposals. The one recent statutory change, the One Big Beautiful Bill Act signed in 2025, left the rate structure and the step-up alone and instead expanded the exclusion for qualified small business stock.
Where the Rules Stand Now
Sales of assets held one year or less produce short-term gains taxed as ordinary income, with a top rate of 37%.1Internal Revenue Service. Topic No. 409 Capital Gains and Losses Hold longer than a year and the gain qualifies for the long-term rates: 0%, 15%, or 20%.
For tax year 2026, single filers pay 0% on long-term gains up to $49,450 of taxable income, 15% from there to $545,500, and 20% above that. Married couples filing jointly get the 0% rate up to $98,900, the 15% rate to $613,700, and 20% above.2Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates These brackets adjust for inflation each year.
A separate 3.8% Net Investment Income Tax applies once modified adjusted gross income exceeds $200,000 for singles or $250,000 for joint filers.3Internal Revenue Service. Topic No. 559 Net Investment Income Tax It stacks on the capital gains rate, so the current federal ceiling on long-term gains is 23.8%. The NIIT thresholds have never been indexed for inflation, so they pull in more taxpayers each year.
Two asset categories carry higher maximums: collectibles (art, coins, antiques, precious metals) top out at 28%, and depreciation recapture on real estate tops out at 25%. The NIIT can still apply on top of either.1Internal Revenue Service. Topic No. 409 Capital Gains and Losses
What the One Big Beautiful Bill Act Actually Changed
The 2025 tax law is often described as sweeping, but on capital gains it was narrow. The rate structure, the NIIT, and the step-up at death were untouched. The main change was to Section 1202, the exclusion for qualified small business stock.
For QSBS acquired after July 4, 2025, the law introduced a tiered exclusion: 50% of gain excluded after a three-year hold, 75% after four years, and 100% after five years. It raised the per-issuer gain cap to $15 million, indexed for inflation starting in 2027, and lifted the gross asset ceiling for qualifying companies to $75 million. Stock acquired before July 5, 2025 still follows the older rule requiring a five-year hold for the 100% exclusion. Any gain not fully excluded under the three- or four-year tiers is taxed at the 28% collectibles rate rather than the standard long-term rates.
Nothing in the law adjusted the general holding period, the preferential rates for ordinary long-term gains, or the treatment of appreciated property passing through an estate.
Proposals to Raise Rates on High Earners
The most prominent reform proposal would tax long-term gains as ordinary income for taxpayers with adjusted gross income above $1 million. Under prior budget proposals, that would have applied the 39.6% top ordinary rate. Layered with the 3.8% NIIT, the effective federal ceiling on long-term gains would have reached 43.4%, roughly double the current 23.8%. This proposal was not enacted, and the 2025 law preserved the existing rates.
A different approach uses surtaxes rather than reclassification. The Working Americans’ Tax Cut Act, one recent example, would impose a 5% surtax on AGI above $1 million for single filers ($1.5 million joint), 10% above $2 million ($3 million joint), and 12% above $5 million ($7.5 million joint). Because the surtaxes apply to AGI, they would hit capital gains alongside wages and every other income category. This bill has also not been enacted.
These proposals originated from Democratic lawmakers and have not advanced in Republican-controlled chambers. The current environment leans toward reduction rather than increase, so standalone rate hikes face steep near-term odds. The politics can shift quickly after an election, which is why the same proposals resurface.
Proposals to Change How Gains Are Taxed at Death
Under Section 1014, a decedent’s appreciated assets receive a basis equal to fair market value on the date of death.4Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Stock a parent bought for $50,000 and left to an heir at a $500,000 value has a $500,000 basis in the heir’s hands; a sale the next day at $500,000 produces no taxable gain. Appreciation that accrued during the parent’s lifetime escapes income tax entirely. This rule remains in force for 2026.
Reform proposals have taken two directions. The first would treat death itself as a realization event, taxing unrealized appreciation above a per-person threshold. The best-known version applied to unrealized gains above $1 million per individual, $2 million per couple, and calculated the tax as if the decedent sold every appreciated asset immediately before death. Illiquid holdings such as family businesses and farms would qualify for a 15-year payment schedule to prevent forced sales. No version of this proposal has become law.
The second direction is carryover basis. Instead of resetting to fair market value, the heir would inherit the decedent’s original cost basis and pay tax on the full appreciation at eventual sale. Congress tried this once, for deaths in 2010, under the 2001 Bush tax cuts. The step-up was restored after a single year. The practical difficulty of tracing a decedent’s original basis, sometimes across decades, proved a significant obstacle.
Inflation Indexing of Basis
A different structural proposal would adjust an asset’s cost basis for inflation before computing gain. Buy for $100,000, general prices rise 20%, and the adjusted basis becomes $120,000, so tax falls only on appreciation above the inflation-adjusted figure. The effect is to tax real economic gain rather than nominal gain driven by rising prices.
Bills on this concept generally limit the adjustment to assets held more than three years, use a GDP price deflator instead of the consumer price index, exclude corporate taxpayers, and prohibit the adjustment from creating or increasing a loss. Estimated revenue costs range from roughly $10 billion to $30 billion per year, depending on design and inflation measure.5Congress.gov. Indexing Capital Gains Taxes for Inflation The idea attracts bipartisan interest in principle and consistent resistance on revenue grounds.
Carried Interest
Carried interest is the share of fund profits paid to managers at private equity, venture capital, and hedge fund firms as compensation for running the fund. Even though it is earned for services rather than through the manager’s own invested capital, it qualifies for long-term capital gains treatment when the underlying assets are held more than three years. The federal ceiling on that income is therefore 23.8% rather than the 40.8% (37% plus NIIT) that would apply to ordinary compensation.
The Tax Cuts and Jobs Act of 2017 extended the required holding period from one year to three. Proposals to go further and reclassify carried interest as ordinary income altogether appear in nearly every recent Congress. Some versions would also lengthen the standard long-term holding period from one year to two, and push the carried interest requirement to five. None have been enacted, and the three-year rule stands.
The Wash Sale Gap for Digital Assets
The IRS treats cryptocurrency and other digital assets as property, so gains and losses run through the same capital gains framework as stocks or real estate. The wash sale rule, however, does not. The statute references only “shares of stock or securities,” and cryptocurrency fits neither category under current law.
For stocks and ETFs, buying a substantially identical security within 30 days before or after selling at a loss disqualifies the loss; the disallowed amount rolls into the basis of the replacement shares across a 61-day window. A crypto investor can sell at a loss and repurchase the identical token minutes later and still claim the loss. Legislative proposals to extend the wash sale rule to digital assets have been introduced repeatedly and have not passed. The IRS could still challenge the most aggressive loss-harvesting patterns under broader doctrines such as economic substance, but there is no specific statutory rule.
Why Rate Hikes and Death-Basis Reform Get Paired
Raising the capital gains rate without changing what happens at death runs into what economists call the lock-in effect. Higher rates give investors a stronger reason to hold appreciated assets rather than sell, because selling triggers a larger tax bill. Trading volume drops and capital allocation shifts.
Research on prior rate changes finds the effect is real and measurable. After the 1997 rate cut, stocks with large embedded gains and heavy individual-investor ownership saw increased selling volume as prior lock-in unwound. Rate increases produce the reverse: investors sit on gains and defer indefinitely. Under current law, holding long enough means the gain escapes income tax at death entirely through the step-up. That is why proposals to raise the rate and proposals to tax gains at death are often designed together. Raising the statutory rate while leaving the death-basis rule intact strengthens the incentive to use it, and estimated revenue from a rate hike falls accordingly.
The practical takeaway for anyone planning around these rules: the current 0%/15%/20% brackets, the 23.8% ceiling with NIIT, and the step-up at death are what govern decisions today. Everything else in the reform conversation remains a proposal, and most of the recurring ones have been introduced in multiple Congresses without advancing.