A capital gains tax is what you owe the federal government on the profit when you sell an asset for more than you paid. For 2026, long-term gains on assets held more than a year are taxed at 0%, 15%, or 20% depending on your income and filing status. Short-term gains, on assets held a year or less, are taxed at your ordinary income rate, which can run as high as 37%.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The gain isn’t triggered until you actually sell. Watching a stock or a house appreciate on paper creates no tax bill.
Short-Term vs. Long-Term
Holding period is the single biggest factor in what you’ll pay. The dividing line is one year. Gains on assets held one year or less are short-term and taxed like wages. Gains on assets held more than one year are long-term and taxed at the lower capital gains rates.2Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses
The clock starts the day after you acquire the asset and runs through the day you sell it. Buy stock on March 1, 2025, and you need to hold it until at least March 2, 2026, for any profit to qualify as long-term. Selling one day early can nearly double your tax on the same profit.
2026 Long-Term Capital Gains Brackets
The long-term rate that applies to you depends on your total taxable income, not just the gain. For 2026, the thresholds are:3IRS.gov. Revenue Procedure 2025-32 – 2026 Adjusted Items
- 0% rate: taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household, $49,450 married filing separately.
- 15% rate: income above the 0% ceiling and up to $545,500 single, $613,700 married filing jointly, $579,600 head of household, $306,850 married filing separately.
- 20% rate: income above the 15% ceiling.
Your wages, interest, and business income all count toward the threshold, so they push your gain into higher brackets. A common mistake is assuming the gain is taxed in isolation.
The 3.8% Surtax for Higher Earners
On top of the regular rates, high earners pay an additional 3.8% net investment income tax on capital gains and other investment income. It kicks in when modified adjusted gross income exceeds $200,000 single or $250,000 married filing jointly.4Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax The 3.8% applies to whichever is smaller: your net investment income, or the amount by which your income exceeds the threshold. Those thresholds are not indexed for inflation, so more taxpayers cross them each year.
When the Standard Rates Don’t Apply
Two categories of long-term gain get taxed at higher maximums than the usual 0/15/20% schedule.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Collectibles, including art, antiques, coins, stamps, and precious metals, are taxed at a maximum of 28%. If your ordinary rate would be lower, you pay the lower rate. Most people selling a valuable collection hit the 28% ceiling.
Depreciated real property carries its own trap. When you sell a rental or commercial property you’ve been depreciating, the portion of your gain attributable to prior depreciation deductions (unrecaptured Section 1250 gain) is taxed at up to 25%. Any remaining gain above your original purchase price uses the standard long-term rates. The recapture piece is the part landlords are usually surprised by at closing.
How the Gain Is Calculated
Your taxable gain is the sale price, minus selling costs, minus your cost basis. Basis is where most of the complexity lives.
For assets you bought, basis starts at your purchase price plus any commissions to acquire it. Adjust upward for capital improvements (a new roof on a rental, for example) and downward for any depreciation you’ve claimed. Subtract the resulting adjusted basis from net sale proceeds to get your gain or loss.
Keep the paperwork. Purchase confirmations, closing statements, receipts for improvements, and brokerage statements are your only defense in an audit. If you can’t prove basis, the IRS can treat it as zero, which turns your entire sale price into taxable gain.
Inherited Property
Inherited assets get a fresh basis equal to fair market value on the date the prior owner died, not what they originally paid.6Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This step-up can erase decades of appreciation. If a parent bought stock for $10,000 forty years ago and it was worth $200,000 at their death, your basis is $200,000. Sell for $202,000 the next month and you owe tax on only $2,000.
Gifted Property
Gifts work the opposite way. When someone gives you an asset during their lifetime, you inherit their original basis, not the market value on the day of the gift.7Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Take the same stock at $10,000 as a gift when it’s worth $200,000, sell for $200,000, and you owe tax on the full $190,000 profit. If the fair market value at the time of the gift was below the donor’s basis, your basis for calculating a loss is limited to that lower figure. The difference between inheriting and receiving a gift can run into tens of thousands of dollars in tax.
The Home Sale Exclusion
The biggest capital gains break most people ever use is on their own home. You can exclude up to $250,000 of gain from selling your primary residence, or up to $500,000 if you’re married filing jointly.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence You don’t have to buy another home with the proceeds.
To qualify, you must have owned and lived in the home as your primary residence for at least two of the five years before the sale. The two years don’t have to be consecutive. You also can’t have used this exclusion on another home sale in the two years before the current one.
Sell before hitting the two-year mark and you may still get a partial exclusion if the move was driven by a job change, a health issue, or an unforeseeable event; the excluded amount is prorated by the fraction of the two years you actually met.9Internal Revenue Service. Publication 523, Selling Your Home
Deferring Gains on Investment Real Estate
Investors can defer the tax on real estate profits by swapping one investment property for another in a like-kind exchange, often called a 1031 exchange after the code section.10Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment The gain isn’t erased; the old property’s basis carries over to the new one, and the tax bill moves into the future.
Only real property held for business or investment qualifies. Your personal residence doesn’t. You must identify the replacement property within 45 days of selling the original and close on it within 180 days. Miss either deadline and the whole gain becomes taxable. Some investors chain exchanges for decades, deferring gains until they eventually sell outright or until the property passes to heirs with a stepped-up basis.
Using Losses to Cut Your Bill
Capital losses offset capital gains directly, and they can chip away at other income too. Short-term gains and losses are netted first, then long-term gains and losses are netted separately. If one category comes out negative and the other positive, they offset each other.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses
If total losses exceed total gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Anything left over carries forward indefinitely, keeping its short-term or long-term character. A large loss in one bad year can shelter gains for a decade or more.
The Wash Sale Rule
The IRS blocks a common workaround: selling for a loss and buying the same investment right back. Under the wash sale rule, the loss is disallowed if you buy a substantially identical stock or security within 30 days before or after the sale, a 61-day window centered on the sale date.11Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed loss isn’t lost forever; it gets added to the basis of the replacement shares and the old holding period tacks on. But it doesn’t help you this year.
Reporting the Sale
Every capital gain or loss goes on your return, even when no tax is owed. You list each sale on Form 8949 with acquisition date, sale date, proceeds, and basis.12Internal Revenue Service. Instructions for Form 8949, Sales and Other Dispositions of Capital Assets The totals flow to Schedule D, which separates short-term from long-term and produces your net figure.13Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
If your broker sends you Form 1099-B, the IRS gets a copy too. Skipping a reported transaction is one of the fastest ways to generate an automated notice. When the basis on a 1099-B is wrong (which is common for older shares or transferred accounts), report the sale and correct the basis on Form 8949.
Estimated Tax Payments
A large gain during the year can leave you badly underwithheld. If wage withholding won’t cover the extra tax, you may need to make quarterly estimated payments to avoid an underpayment penalty.14Internal Revenue Service. Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty The safe harbor is paying at least 90% of the current year’s tax or 100% of last year’s (110% if your prior-year income was above $150,000). Form 1040-ES has the worksheet.
State Capital Gains Taxes
The federal bill isn’t the only one. Most states tax capital gains as ordinary income, and rates vary widely. Nine states impose no income tax on capital gains at all; the highest state rates exceed 13%. Some states apply capital gains taxes only above certain thresholds or treat long-term gains differently from short-term. If you’re sitting on a large unrealized gain and have real flexibility about where you live, the state tax difference alone can reach five or six figures.