Ordinary income tax and capital gains tax run on two separate rate schedules, and the gap between them is the whole point. Wages, salaries, interest, and short-term trading profits move through progressive ordinary brackets that top out at 37%. Profits on investments you held for more than a year get their own schedule of 0%, 15%, or 20%. Two people with identical total income can owe very different federal tax bills depending on where their money came from and how long they held it before selling.
What Gets Taxed as Ordinary Income
Ordinary income is the default bucket and it is broad. Wages, salaries, bonuses, commissions, and tips all sit here, whether they arrive on a W-2 or a 1099-NEC.1Internal Revenue Service. Forms and Associated Taxes for Independent Contractors Several kinds of investment income belong here too. Interest from savings accounts, money market accounts, and certificates of deposit is taxed at ordinary rates.2Internal Revenue Service. Topic No. 403, Interest Received So are rental income, non-qualified dividends, and short-term capital gains from assets held one year or less.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
That last one catches newer investors off guard. Sell a stock you bought eight months ago at a profit, and the IRS taxes the gain at the same rate as your paycheck. The preferential capital gains rates only appear once you cross the one-year mark.
What Counts as a Capital Gain
A capital gain is the profit from selling a capital asset for more than you paid. The category is wide: stocks, bonds, mutual funds, ETFs, real estate you don’t live in, vacation homes, undeveloped land, and collectibles like art, rare coins, and precious metals.4Legal Information Institute. 26 USC 1(h)(5) – Collectibles Gain and Loss
Your original purchase price plus adjustments like transaction costs is your cost basis. Sale price minus cost basis is the gain or loss. Keeping clean records of what you paid and when you bought matters, because both numbers control the tax directly.
The One-Year Line That Changes Everything
The single biggest factor in capital gains taxation is how long you owned the asset before selling. Hold for one year or less and any profit is a short-term capital gain taxed at your ordinary rate. Hold for more than one year and it qualifies for long-term rates.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Your holding period starts the day after you acquire the asset and includes the day you sell. Selling on the one-year anniversary itself still counts as short-term; you need at least one more day. On a large position, the difference between a December 31 sale and a January 2 sale can shift thousands of dollars from the 37% bracket down to 15%.
2026 Ordinary Income Brackets
Federal income tax is progressive. Your income moves through a series of brackets, and only the dollars inside each range are taxed at that bracket’s rate. The first dollar of taxable income is always taxed at 10%; the higher rates only touch the income stacked at the top.
For tax year 2026, the brackets for single filers are:5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 10%: taxable income up to $12,400
- 12%: $12,401 to $50,400
- 22%: $50,401 to $105,700
- 24%: $105,701 to $201,775
- 32%: $201,776 to $256,225
- 35%: $256,226 to $640,600
- 37%: over $640,600
For married couples filing jointly, each bracket is roughly double. The 10% bracket runs through $24,800, the 12% bracket through $100,800, and the top 37% rate hits above $768,700.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 These thresholds are adjusted annually for inflation.
2026 Long-Term Capital Gains Rates
Long-term capital gains have their own three-tier schedule, and the rates sit well below ordinary rates at every income level. The rate that applies depends on your total taxable income for the year, including the gains themselves.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
For 2026, single filers pay:
- 0%: taxable income up to $49,450
- 15%: $49,451 to $545,500
- 20%: over $545,500
For married couples filing jointly, the 0% rate covers taxable income up to $98,900, the 15% rate runs through $613,700, and the 20% rate applies above that.
The 0% bracket is worth pausing on. A married couple with $95,000 in total taxable income can sell appreciated stock and pay no federal tax on the long-term gain, as long as the total stays under the threshold. Retirees with modest pension income sometimes land in this zone and can harvest gains at zero.
Qualified Dividends Get the Lower Rates Too
Not every dividend is ordinary income. Qualified dividends from domestic corporations and certain foreign companies are taxed at the same 0/15/20% rates as long-term capital gains. The condition is a holding period: you must have owned the underlying stock for more than 60 days during the 121-day window surrounding the ex-dividend date.6Legal Information Institute. 26 USC 1(h)(11) – Capital Gains and Losses
Dividends that fail the test, sometimes called ordinary or non-qualified dividends, are taxed at your full ordinary rate. Your 1099-DIV usually splits the two, but active trading around ex-dividend dates can quietly disqualify shares that would otherwise have made the cut.
Asset Types That Break the Standard Rates
Not every long-term gain gets the 0/15/20% treatment. The tax code carves out a few categories with their own ceilings.
Collectibles
Long-term gains on collectibles (art, rare coins, antiques, precious metals) are taxed at a maximum rate of 28%.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses If your ordinary bracket is below 28%, you pay your regular rate. If you’d otherwise sit above 28%, the collectibles rate caps there rather than dropping to 15% or 20%.7Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
Depreciation Recapture on Real Estate
If you claimed depreciation on rental or business real estate, the IRS wants some of it back at sale. The portion of your gain attributable to prior depreciation, called unrecaptured Section 1250 gain, is taxed at a maximum of 25%.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses Any remaining gain above the recapture amount gets the normal long-term rates.8Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty
Qualified Small Business Stock
Section 1202 offers a strong break for early investors in small companies. Buy stock directly from a qualifying small business (a domestic C corporation with aggregate gross assets under $50 million at issuance) and hold it for at least five years, and you can exclude 100% of the gain from federal income tax, up to the greater of $10 million or ten times your basis.9Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock Shorter holds get smaller exclusions: 50% at three years, 75% at four.
The 3.8% Net Investment Income Tax
High earners face an extra layer on top of whatever capital gains rate already applies. The Net Investment Income Tax adds 3.8% when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.10Internal Revenue Service. Net Investment Income Tax It applies to the lesser of your net investment income or the amount by which your income exceeds the threshold.
So the true maximum federal rate on a long-term capital gain is 23.8%, not the 20% headline. For collectibles the effective ceiling reaches 31.8%. The NIIT thresholds are not indexed for inflation, so they catch more taxpayers each year as incomes rise.11Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
Netting Gains Against Losses
You don’t calculate tax on each profitable sale in isolation. The IRS requires you to net gains and losses first. Short-term against short-term, long-term against long-term, and then any remaining net figure from one category offsets the other.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
If losses exceed gains after netting, you can deduct up to $3,000 of the excess against ordinary income each year, or $1,500 if married filing separately.12Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses Any leftover losses carry forward indefinitely, reducing gains dollar for dollar in future years until used up. Selling losing positions before year-end to offset gains elsewhere is called tax-loss harvesting.
The Wash Sale Trap
Tax-loss harvesting has a rule that undoes it if you’re not careful. Sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale, and the IRS disallows the loss entirely.13Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The window runs both directions.
The disallowed loss isn’t lost forever. It gets added to the cost basis of the replacement shares and reduces your taxable gain when you eventually sell those. But if you were counting on the deduction this year, the wash sale rule defeats it. Waiting a full 31 days before repurchasing, or buying a similar but not identical fund in the interim, is the usual workaround.
Selling Your Home
The largest capital gain most people ever realize is on their primary residence, and Section 121 gives it uniquely generous treatment. You can exclude up to $250,000 of profit if you’re single, or $500,000 if married filing jointly, provided you meet two tests.14Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
You must have owned the home for at least two of the five years before the sale, and lived in it as your primary residence for at least two of those five years. The residence period doesn’t need to be consecutive; any 730 days within the five-year window works. For joint filers claiming the $500,000 exclusion, both spouses must meet the residence test, but only one has to meet the ownership test. You also can’t have used the exclusion for another home sale in the past two years. A partial exclusion may still be available if you fall short because of a job change, health reasons, or an unforeseeable event.15Internal Revenue Service. Publication 523, Selling Your Home Any gain above the exclusion is taxed at your applicable long-term rate.
State Taxes Are Separate
Federal rates are only part of the total. Most states tax capital gains as regular income, which can add anywhere from a few percentage points to well over 10% on top of the federal bill. A handful of states impose no individual income tax at all, while others have added special surcharges aimed specifically at high-dollar gains. The combined federal-plus-state rate on a large long-term gain can approach or exceed 30% depending on where you live.