How Much Long-Term Capital Gain Is Tax-Free?

At the federal level, long-term capital gains can be entirely tax-free when your total taxable income stays under the 0% bracket ceiling: for the 2026 tax year, that’s $49,450 for single filers and $98,900 for married couples filing jointly. Beyond that bracket, other provisions can still shelter large gains, including the home sale exclusion, the step-up in basis on inherited property, and the Section 1202 exclusion for qualified small business stock. So the honest answer to how much long-term capital gain is tax-free is: it depends on your income, what you sold, and how you acquired it.

2026 Income Thresholds for the 0% Rate

The long-term capital gains rate structure has three tiers: 0%, 15%, and 20%. The rate that applies depends on your taxable income after deductions. For tax years beginning in 2026, the 0% bracket covers taxable income up to:

$49,450 for single filers and married filing separately
$98,900 for married filing jointly or a surviving spouse
$66,200 for head of household

The 15% bracket picks up above those figures and runs to $545,500 (single), $613,700 (joint), and $579,600 (head of household). Anything above is taxed at 20%.¹ These thresholds are adjusted for inflation each year, so prior-year numbers are already out of date.

How the Stacking Calculation Actually Works

The 0% bracket sounds generous, but it fills from the bottom up. Wages, interest, and other ordinary income take the first bites out of the bracket space. Only the capital gains that still fit under the threshold after ordinary income is counted escape tax.²

Take a single filer with $35,000 of ordinary taxable income and $20,000 of long-term capital gains. Total taxable income comes to $55,000. The first $14,450 of the gain ($49,450 minus $35,000) sits inside the 0% bracket and is tax-free. The remaining $5,550 lands in the 15% bracket. A single filer with $50,000 of ordinary income and no other adjustments has already used up the 0% room, so every dollar of long-term gain starts at 15%.¹

This is the mechanic that makes the 0% rate especially useful in lower-income years: a gap year between jobs, an early-retirement window before Social Security starts, a year with unusually low self-employment income. Selling appreciated assets in those years can produce real gains at zero federal tax.

You Have to Hold for More Than a Year

Only gains on assets held more than one year get the 0/15/20 treatment. Sell at exactly the one-year mark or sooner and the gain is short-term, taxed at your ordinary rate. The safe practice is to wait at least a year and a day after purchase. The holding period starts the day after you acquire the asset and ends on the day you sell.² One day too early can move a gain from a 0% rate to a rate as high as 37%.

Selling Your Home: Up to $500,000 Tax-Free

For most people, the largest tax-free gain of their life comes from selling a home. Section 121 lets you exclude up to $250,000 of profit on the sale of a primary residence, or $500,000 for a married couple filing jointly. The exclusion is a flat dollar amount separate from the income-based brackets; excluded gain simply doesn’t appear as taxable income.³

Two tests have to be met. You must have owned the home for at least two of the five years before the sale, and you must have used it as your primary residence for at least two of those five years. The ownership and use periods don’t need to overlap and neither has to be consecutive. Someone who lived in a home in 2007–2008 and again in 2024–2025 would satisfy the use test for a 2026 sale.³ For joint filers, both spouses must meet the use test to claim the full $500,000; if only one does, the ceiling drops to $250,000.

You can use the exclusion once every two years. Gain above the exclusion amount is taxable and runs through the standard 0/15/20 brackets.

Partial Exclusion for Early Sales

Selling before you satisfy the full two-year tests can still produce a prorated exclusion if the sale was driven by a qualifying reason: a job relocation at least 50 miles farther from the home, a health-related move, or an unforeseen event such as divorce, job loss, or a natural disaster. One year of use out of the required two, for example, yields half the maximum exclusion.⁴

Inherited Assets Get a Step-Up in Basis

When you inherit property, the cost basis resets to the asset’s fair market value on the date of death. If a parent bought stock for $10,000 thirty years ago and it was worth $200,000 when they died, your basis is $200,000. Sell the next month for $202,000 and you owe tax on $2,000. The $190,000 of appreciation during the original owner’s lifetime is never taxed.⁵

Inherited property also gets automatic long-term treatment no matter how briefly you hold it. Even a sale the day after inheritance qualifies for the lower long-term rates.⁶

Gifts Do Not Get a Step-Up

Gifted assets work differently, and people frequently confuse the two. When someone gives you property during their lifetime, you take their original cost basis. If an uncle bought shares for $5,000 and gifts them to you when they’re worth $50,000, your basis is $5,000. Sell for $50,000 and you have a $45,000 taxable gain.⁷ The step-up only happens at death.

Qualified Small Business Stock (Section 1202)

Section 1202 can shelter up to 100% of the gain on stock in a qualifying small business held more than five years. The company must be a domestic C corporation with gross assets of $50 million or less when the stock was issued, and you must have acquired the shares directly from the corporation for cash, property, or services.⁸

The exclusion has a per-issuer cap: the greater of $10 million or ten times your adjusted basis in that company’s stock for shares issued before mid-2025, rising to $15 million (indexed for inflation going forward) for shares issued after that date. Service-based businesses such as law firms, medical practices, and financial services companies don’t qualify. The 100% exclusion applies to stock acquired after September 27, 2010; older stock may qualify for a 50% or 75% exclusion depending on when it was purchased.

Some Long-Term Gains Don’t Get the 0/15/20 Structure

Two categories are carved out of the standard rate schedule and can’t drop to 0% no matter how low your income is.

Collectibles, meaning artwork, antiques, coins, precious metals, and wine, are taxed at up to 28% on long-term gains. Your ordinary rate applies if it’s lower, but you can’t get below the collectibles ceiling.⁹

Depreciated real estate has its own trap. If you claimed depreciation on rental property and later sell at a profit, the portion of the gain attributable to those depreciation deductions is taxed at up to 25%. This is unrecaptured Section 1250 gain. Only the gain above your original purchase price gets the standard long-term rates.⁹

The 3.8% Net Investment Income Tax

Even a gain sitting in the 0% capital gains bracket can trigger the 3.8% net investment income tax. The NIIT applies to the smaller of your net investment income or the amount by which your modified adjusted gross income exceeds:¹⁰

$200,000 for single filers and heads of household
$250,000 for married filing jointly
$125,000 for married filing separately

These thresholds are not indexed for inflation and have been the same since 2013.¹¹ A single filer with $180,000 of wages and $40,000 of long-term gains has modified AGI of $220,000; the surtax applies to $20,000 of that, adding $760 in tax even if some of the gain would otherwise fall in the 0% capital gains bracket.

Offsetting Gains With Capital Losses

Capital losses reduce taxable gains dollar for dollar, following a specific netting sequence. Short-term losses first offset short-term gains, long-term losses first offset long-term gains, and any remaining loss in one category crosses over to the other.

If losses exceed gains for the year, you can deduct up to $3,000 of the net loss against ordinary income ($1,500 for married filing separately). Anything left over carries forward indefinitely.¹²

The wash sale rule blocks a loss deduction if you buy the same or a substantially identical security within 30 days before or after the sale. The disallowed loss isn’t lost forever; it gets added to the basis of the replacement shares. But it won’t be available to offset a current-year gain, which matters if you were counting on it.

State Tax Is a Separate Question

Federal treatment is only half the picture. Most states tax capital gains as ordinary income, with rates roughly from 1% to over 13%. A few states have no income tax. A gain that is entirely federal-tax-free under the 0% bracket will still be taxed by most states, so any planning around the federal thresholds should account for the state hit as well.

1
Internal Revenue Service. Revenue Procedure 2025-32
2
Internal Revenue Service. Topic No 409, Capital Gains and Losses
3
Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence
4
Internal Revenue Service. Publication 523, Selling Your Home
5
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
6
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
7
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
8
Office of the Law Revision Counsel. 26 US Code 1202 – Partial Exclusion for Gain From Certain Small Business Stock
9
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
10
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
11
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
12
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses