Yes. Children do have to pay capital gains tax when they sell an investment at a profit, because the IRS treats every person as a separate taxpayer from birth. In practice, a child’s first $1,350 of unearned income in 2026 is tax-free, and many children with modest portfolios owe nothing. Above that, a set of rules called the kiddie tax can push the child’s gains into the parents’ bracket.
The Child Is the Taxpayer
Federal tax law draws no line between a five-year-old and a fifty-year-old on investment profits. If a child owns stock, mutual fund shares, or real estate that gets sold for more than it was purchased for, the difference is a capital gain and the child is responsible for reporting it. Nothing is owed until an actual sale happens. A brokerage statement showing that shares have gone up in value does not create a tax bill on its own.
Children usually hold investments through custodial accounts opened under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act. An adult manages the account, but the child is the legal owner of the assets for tax purposes. That ownership is what makes the child, not the parent, the taxpayer on any gains realized inside the account.
How Much Tax the Child Owes
Two things drive the rate: how long the investment was held, and how the kiddie tax interacts with the gain.
Assets sold after being held for one year or less produce short-term capital gains, taxed at ordinary income rates. Assets held for more than one year produce long-term capital gains, which qualify for preferential rates of 0%, 15%, or 20% depending on total taxable income.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses
This matters enormously for children. A child with little income will often fall entirely inside the 0% long-term capital gains bracket, so long-term gains can be completely federal-tax-free as long as the kiddie tax does not push the rate higher. Short-term gains get no such break and are taxed as ordinary income no matter how small the child’s total earnings are.
The Kiddie Tax
Congress created the kiddie tax to stop high-income parents from shifting large portfolios into their children’s names and using the child’s lower bracket. Once a child’s unearned income crosses a threshold, the excess is taxed at the parents’ rate.
For 2026, the tiers work like this:2Internal Revenue Service. Rev. Proc. 2025-32
- First $1,350: tax-free, covered by the dependent’s standard deduction.
- Next $1,350 (up to $2,700 total): taxed at the child’s own rate, usually 10% for ordinary income or 0% for long-term gains.
- Everything above $2,700: taxed at the parents’ marginal rate, which can be as high as 37%.3Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
The kiddie tax applies to children under 19 at the end of the tax year. It also applies to full-time students between 19 and 23 whose earned income does not cover more than half of their own support. Once a child ages out of these rules, investment income is taxed entirely at the child’s own rate.
Unearned income for kiddie tax purposes includes capital gains, dividends, interest, rents, and royalties. Wages from a summer job or part-time work are earned income and are not subject to the kiddie tax.4Internal Revenue Service. Instructions for Form 8615
Where the Child’s Cost Basis Comes From
The size of the taxable gain depends on the child’s cost basis in the asset, and how the asset got into the child’s name determines that basis. Getting this wrong is one of the most expensive mistakes families make.
Gifts Carry the Donor’s Basis
When someone gives an appreciated asset to a child during their lifetime, the child inherits the donor’s original cost basis. If a grandparent bought stock for $5,000 and gifts it to a grandchild when it is worth $25,000, the child’s basis stays at $5,000. Selling those shares for $25,000 produces a $20,000 capital gain taxable to the child.5Office of the Law Revision Counsel. 26 U.S.C. 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
This catches many families off guard. A donor may have held the stock for decades, with a large built-in gain, and the child receives that entire gain along with the asset. The kiddie tax may then apply the parents’ rate to most of it. Before gifting highly appreciated assets to a minor, run the numbers to see whether the tax benefit of using the child’s bracket actually survives.
Inherited Assets Get a Stepped-Up Basis
Assets a child inherits after someone dies receive a stepped-up basis equal to the fair market value on the date of death. Using the same example, if the grandparent died holding the $5,000 stock now worth $25,000, the child’s basis resets to $25,000. Selling immediately at that price produces zero taxable gain.6Office of the Law Revision Counsel. 26 U.S.C. 1014 – Basis of Property Acquired From a Decedent All gains that accumulated during the deceased person’s lifetime are wiped out for the child’s tax purposes.
When Your Child Has to File a Return
Not every child with investment income needs to file. For 2026, a dependent child with only unearned income must file if that income exceeds $1,350.7Internal Revenue Service. Check if You Need to File a Tax Return If the child also has earned income from a job, a return is required when gross income exceeds the larger of $1,350 or the child’s earned income plus $450.2Internal Revenue Service. Rev. Proc. 2025-32
The numbers you need arrive on Form 1099-B for proceeds from securities sales and Form 1099-DIV for dividends and capital gain distributions.8Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions Add the totals and compare to the threshold. Missing a required filing can result in penalties and interest.
Reporting the Income: Parent’s Return or Child’s
When a filing is required, there are two paths.
Parents can elect to report a child’s investment income on their own Form 1040 by attaching Form 8814. That election is only available when the child’s income consists entirely of interest, dividends, and capital gain distributions from mutual funds, and the child’s gross income for 2026 falls between $1,350 and $13,500.2Internal Revenue Service. Rev. Proc. 2025-32 If the child sold individual stocks, bonds, or real estate, this option is unavailable and the child must file their own return.9Internal Revenue Service. Instructions for Form 8814 – Parents’ Election To Report Child’s Interest and Dividends Rolling the child’s income into your return also raises your adjusted gross income, which can reduce eligibility for income-sensitive credits and deductions.
When a child’s unearned income exceeds $2,700, they use Form 8615 on their own return to calculate the portion of income taxed at the parents’ rate.4Internal Revenue Service. Instructions for Form 8615 Whoever prepares the child’s return will need the parents’ taxable income to finish that calculation.
State Taxes
Federal rules are only part of the picture. Most states treat capital gains as ordinary income and tax them at the same rates as wages. A few states tax long-term gains at a reduced rate, and states with no income tax generally do not tax capital gains at all. The state rule follows the federal principle: the owner of the asset is the taxpayer. Check your state’s revenue department for the specific thresholds and rates that apply to your child.