The long-term capital gains tax is what the federal government charges on profits from selling an asset you held for more than one year, and it runs at 0%, 15%, or 20% depending on your taxable income and filing status.1Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed That is well below the top ordinary income rate of 37% that applies to short-term gains and wages. Higher earners may owe an additional 3.8% surtax on investment income, which pushes the effective federal ceiling to 23.8%.
What Makes a Gain Long-Term
The line is one year and a day. Your holding period starts the day after you buy the asset and runs through the day you sell it, so stock purchased on March 15, 2025 has to be held until at least March 16, 2026 for any profit to qualify.2Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses Sell a day too early and the entire gain is short-term, taxed at your ordinary income rate of anywhere from 10% to 37% for 2026.3Internal Revenue Service. 2026 Adjusted Items – Tax Rate Tables For a taxpayer in the 32% or 35% bracket sitting on a large unrealized profit, that single day can be worth tens of thousands of dollars.
The rule applies broadly. Nearly everything you own for personal use or investment is a capital asset, including stocks, bonds, mutual funds, ETFs, cryptocurrency, real estate held for investment, vacant land, precious metals, art, collectibles, and personal property like your car.4Office of the Law Revision Counsel. 26 USC 1221 – Capital Asset Defined Business inventory, self-created works like manuscripts, and depreciable business property are the main exclusions.5eCFR. 26 CFR 1.1221-1 – Meaning of Terms One quirk to know: personal property sold at a gain is taxable, but a loss on personal-use property is not deductible.
2026 Rate Brackets
Which of the three rates applies depends on your total taxable income and your filing status. For 2026:3Internal Revenue Service. 2026 Adjusted Items – Tax Rate Tables
- 0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), $66,200 (head of household), or $49,450 (married filing separately).
- 15% rate: income above the 0% threshold up to $545,500 (single), $613,700 (joint), $579,600 (head of household), or $306,850 (married filing separately).
- 20% rate: income above the 15% ceiling.
These breakpoints adjust for inflation each year. Most filers land in the 15% bracket. The 0% rate is a genuine zero on the federal side and can be a useful tool in years when taxable income runs low, such as early retirement before Social Security or required distributions begin.
Collectibles and Depreciation Recapture
Not every long-term gain uses the 0/15/20 schedule. Profits from selling collectibles, including art, coins, stamps, and antiques, are taxed at a maximum rate of 28%. If you sell rental or business real estate at a gain, the portion tied to depreciation deductions you previously claimed is taxed at a maximum of 25%, with any remaining gain taxed at the standard long-term rates.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Qualified Dividends
Dividends from most domestic stocks and certain foreign corporations get the same 0/15/20 rates as long-term gains, even though nothing was sold. To qualify, you have to have owned the stock for at least 61 days during the 121-day window that starts 60 days before the ex-dividend date. Dividends that fail the test are taxed as ordinary income.
The 3.8% Net Investment Income Tax
An additional 3.8% surtax applies to investment income, including capital gains, once your modified adjusted gross income crosses $200,000 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax The tax hits the smaller of your net investment income or the amount by which your income exceeds the threshold. It also applies to interest, dividends, rental income, and royalties.8Internal Revenue Service. Net Investment Income Tax
For taxpayers above those income levels, the practical top federal rate on a long-term gain is 23.8%, not 20%. These thresholds are not indexed to inflation, so more people cross into them each year.
Calculating the Gain: Your Cost Basis
The taxable gain is what you received for the asset minus your basis in it. Basis usually starts as what you paid.9Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property Cost The number on your return, though, is adjusted basis, which folds in brokerage commissions, transfer fees, settlement charges, and, for real estate, capital improvements like a new roof or a kitchen remodel. Higher basis, smaller taxable gain.
Inherited Property
When you inherit an asset, your basis is generally its fair market value on the date the previous owner died, not what they originally paid.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This step-up can wipe out decades of unrealized appreciation. If your parent bought stock long ago for $10,000 and it was worth $200,000 at death, your basis is $200,000, and selling for $205,000 means tax on just $5,000.
Gifted Property
Lifetime gifts work differently. You generally take over the donor’s original basis, so stock your aunt bought for $5,000 and gave you when it was worth $50,000 gives you a $5,000 basis.11Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust There is a narrow exception for losses: if the fair market value at the time of the gift is lower than the donor’s basis, your basis for calculating a loss is that lower fair market value, which stops donors from shifting unrealized losses to someone else.
Offsetting Gains With Losses
Capital losses cancel capital gains dollar for dollar. A $20,000 gain on one stock and a $12,000 loss on another leaves $8,000 of net gain to tax. Long-term losses offset long-term gains first, and short-term losses offset short-term gains first, before any leftover losses cross over.
When your losses exceed your gains, 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 Anything beyond that carries forward indefinitely, keeping its long-term or short-term character.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses The annual cap feels tight after a big loss, but the unlimited carryforward means the benefit eventually shows up.
The Wash Sale Rule
Selling an investment at a loss and buying back the same or a substantially identical security within 30 days before or after the sale disallows the loss.13Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities The disallowed amount gets added to the basis of the replacement shares, so you recover it when you eventually sell those, but you cannot use it against gains in the current year. Investors regularly stumble into this by selling a loser and repurchasing it a few days later.
The Home Sale Exclusion
If the asset you sold is your primary residence, you can exclude up to $250,000 of gain from income, or $500,000 for a married couple filing jointly, as long as you owned and lived in the home for at least two of the five years before the sale.14Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The two years do not need to be consecutive, and you can use the exclusion once every two years.
For most homeowners, the exclusion eliminates the taxable gain entirely. Anything above the excluded amount is taxed at the regular long-term rates. Gain covered by the exclusion is also exempt from the 3.8% net investment income tax.8Internal Revenue Service. Net Investment Income Tax
Paying the Tax After a Large Sale
If you realize a large gain during the year, waiting until April to pay can trigger an underpayment penalty. The IRS expects estimated payments if you will owe at least $1,000 after withholding and credits and your withholding will not cover the lesser of 90% of the current year’s tax or 100% of last year’s tax.15Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc. That safe harbor rises to 110% of last year’s tax if your prior-year adjusted gross income was above $150,000.
The cleanest fix after a big sale is to send an estimated payment for the quarter in which the gain hit. A gain realized between July and September, for example, means an estimated payment due September 15.
Reporting to the IRS
Each sale or exchange goes on Form 8949, showing the property description, acquisition date, sale date, proceeds, and cost basis.16Internal Revenue Service. Instructions for Form 8949 Brokerages report most of the same information to you and the IRS on Form 1099-B, so the numbers on your return need to match.17Internal Revenue Service. Instructions for Form 1099-B (2026) Mismatches are one of the more common triggers for automated notices. The totals from Form 8949 flow to Schedule D of your Form 1040, which produces the net capital gain or loss for the year.18Internal Revenue Service. Instructions for Schedule D (Form 1040)
State Taxes Sit on Top
The federal rate is only part of the bill. Most states tax capital gains as ordinary income, with top rates ranging from under 3% to over 13%. A handful of states have no income tax at all. Your total tax on a long-term gain is the federal rate, plus the 3.8% surtax if it applies, plus your state’s rate, which for high earners in high-tax states can approach 37% combined.