How Is Stock Taxed? Rates, Brackets, and the 3.8% Surtax

Stock is taxed in two situations: when you sell shares for more than you paid, and when you receive dividends. How much you owe depends mostly on how long you held the shares. Profits on stock held one year or less are taxed as ordinary income at rates up to 37% for 2026. Profits on stock held longer than a year, along with most dividends from U.S. companies, get preferential federal rates of 0%, 15%, or 20%. High earners add a 3.8% surtax on top.

Holding Period Drives the Rate

Sell within one year of buying and any profit is a short-term capital gain, taxed at the same federal rates as your wages — anywhere from 10% to 37% for 2026.¹ Hold longer than a year and the profit becomes a long-term capital gain, taxed at 0%, 15%, or 20% depending on your taxable income.²

The gap is real money. A single filer earning $100,000 who sells stock for a $10,000 short-term gain pays 24% on that profit. The same gain held one day longer would face 15%.

2026 Long-Term Capital Gains Brackets

The rate on long-term gains and qualified dividends turns on your taxable income and filing status. For 2026, the 0% rate applies to taxable income up to:²

Single filers: $49,450
Married filing jointly: $98,900
Head of household: $66,200

The 15% rate covers taxable income above those ceilings up to $545,500 (single), $613,700 (married filing jointly), and $579,600 (head of household). Income above those thresholds is taxed at 20%.

Short-term gains don’t have their own brackets. They stack on top of your other ordinary income and are taxed at whatever marginal rate applies, from 10% on the first $12,400 of taxable income for a single filer up to 37% on income above $640,600.³

The 3.8% Surtax for Higher Earners

On top of the capital gains rate, a 3.8% Net Investment Income Tax applies when your modified adjusted gross income exceeds $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).⁴ Combined with the 20% long-term rate, that produces a top effective federal rate of 23.8% on stock gains for the highest earners.

How the Taxable Gain Is Calculated

You’re not taxed on the full sale price. You’re taxed on the difference between what you received and your cost basis, which is what you paid for the stock plus commissions or transaction fees.⁵ Buy 100 shares at $50 with a $5 commission, and your basis is $5,005. Sell them for $7,000 and your taxable gain is $1,995.

Corporate actions shift the basis. A 2-for-1 split doubles your share count and cuts your per-share basis in half. Reinvested dividends create new lots, each with its own basis equal to the price on the reinvestment date. People often forget those reinvested lots at sale time and overpay by understating basis.

When you’ve bought the same stock at different times and prices, you have to decide which shares you’re selling. Most brokerages default to first-in, first-out, selling your oldest shares first.⁶ That often qualifies the gain as long-term but doesn’t always produce the smallest tax bill. Specific identification lets you designate higher-basis lots to sell, shrinking the taxable gain. You have to make that designation at the time of the trade; you can’t rewrite the choice later.

How Dividends Are Taxed

Dividends split into two categories. Ordinary (non-qualified) dividends are taxed at your regular income tax rate. Qualified dividends get the same preferential rates as long-term capital gains — 0%, 15%, or 20%.⁷

Most dividends from U.S. corporations qualify, but only if you meet a holding period test: you must have owned the stock for more than 60 days during the 121-day window that starts 60 days before the ex-dividend date. The ex-dividend date is the first day a buyer won’t receive the upcoming dividend. Buy just before the dividend and sell shortly after, and the payment gets reclassified as ordinary income.⁸

Dividends are taxable in the year they’re paid to your account even when you reinvest them automatically. Your brokerage reports the totals on Form 1099-DIV, with ordinary dividends in box 1a and the qualified portion in box 1b.

Using Losses to Cut Your Tax Bill

A stock sold at a loss isn’t only a setback. Capital losses offset capital gains dollar for dollar. The netting works within categories first — short-term losses against short-term gains, long-term against long-term — and leftovers spill across.⁹

If total losses for the year exceed total gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Anything beyond that carries forward to future years indefinitely, keeping its short-term or long-term character.⁹ A bad year in the market can shield gains for years.

Watch Out for the Wash Sale Rule

If you sell a stock at a loss and buy the same security, or one that’s “substantially identical,” within 30 days before or after the sale, the IRS disallows the loss.¹⁰ The disallowed amount gets added to the basis of the replacement shares, and the original holding period tacks on, so you recover the benefit when you eventually sell those replacement shares. The immediate deduction is gone, though.

The rule catches more people than expected. Repurchasing in a different account, a dividend reinvestment plan buying shares inside the 61-day window, or picking up a nearly identical ETF that tracks the same index can all trigger it. If you’re harvesting a loss, stay completely out of the position for the full 30 days after.

Inherited Stock vs. Gifted Stock

These two look similar and are taxed very differently.

Inherited Stock

Stock you inherit gets a step-up in basis to the fair market value on the date the original owner died, regardless of what they paid.¹¹ If a parent bought shares for $5,000 twenty years ago that were worth $50,000 at death, your basis is $50,000. Sell immediately and there’s little or no gain. Inherited stock also automatically qualifies for long-term treatment, even if you sell the day after the estate settles.¹²

Gifted Stock

Gifted stock is different. You generally take the donor’s original cost basis and their holding period.¹³ Stock a donor bought at $20 a decade ago and gifted to you when it’s worth $80 leaves you with a $20 basis and a long-term holding.¹²

There’s a wrinkle when the stock’s value has dropped below the donor’s basis at the time of the gift. If you later sell at a loss, your basis for the loss is the lower fair market value on the gift date, not the donor’s original cost.¹⁴ Sell at a price between the donor’s basis and the gift-date value and you recognize no gain and no loss at all.

Stocks Held Inside Retirement Accounts

The capital gains rules above don’t apply to stock held inside a traditional IRA, 401(k), or similar tax-deferred account. You don’t owe tax when you buy and sell within the account, and dividends aren’t taxed as they accrue. Every dollar you eventually withdraw is taxed as ordinary income, regardless of whether the growth came from dividends, short-term trades, or decades of appreciation.¹⁵ There’s no preferential long-term rate inside a traditional retirement account.

Roth IRAs flip the deal. Contributions go in after-tax, and qualified distributions come out tax-free, including all the growth. To qualify, the account must be at least five years old and you must be 59½ or older.

State Taxes

Federal is only part of the bill. Most states tax capital gains and dividends as ordinary income, so your combined effective rate stacks the state rate on top of the federal rate. A few states don’t tax income at all. State rules on loss deductions and carry-forwards don’t always mirror the federal rules, so check your state before assuming the federal treatment carries over.

Reporting Stock Income

Your brokerage handles most of the paperwork. By mid-February, you receive Form 1099-B listing every stock sale from the prior year with proceeds, cost basis, and short-term or long-term classification.⁶ Dividends are on Form 1099-DIV.

Sales get transferred to Form 8949, one line per transaction, and totaled on Schedule D of Form 1040. Dividend income flows through the 1040, with qualified dividends on their own line so they receive the lower rate.

The IRS matches every 1099 against your return. Leaving off a transaction, even a zero-gain sale or a loss, is one of the surest ways to draw follow-up correspondence. If your 1099-B shows a sale, report it.

1
Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses
2
Internal Revenue Service. Rev. Proc. 2025-32
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. Net Investment Income Tax
5
Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property-Cost
6
Office of the Law Revision Counsel. 26 USC 6045 – Returns of Brokers
7
Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions
8
Internal Revenue Service. Publication 550, Investment Income and Expenses
9
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
10
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
11
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
12
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
13
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
14
Internal Revenue Service. Property (Basis, Sale of Home, Etc.)
15
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)