Capital gains tax is the federal tax you pay on the profit when you sell an asset for more than you paid for it. In 2026, long-term gains (on assets held more than a year) are taxed at 0%, 15%, or 20% depending on your income, while short-term gains (on assets held a year or less) are taxed at your ordinary income rate, which ranges from 10% to 37%. The tax only applies when you actually sell. An investment that rises in value year after year generates no tax bill until the day you cash out.1Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss
That timing rule is the first thing to understand. If you bought stock at $10,000 and it’s now worth $50,000, the $40,000 gain is unrealized and cannot be taxed. Sell the shares and the gain becomes realized, and a taxable event occurs. You control when that happens, which is one of the simplest planning tools available.
Short-Term Versus Long-Term
How long you hold an asset before selling decides which set of rates applies. One year or less is short-term. More than one year is long-term. The clock starts the day after you acquire the asset and runs through the day you sell.2Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses Buy on March 1, 2026, and you need to hold at least until March 2, 2027, to qualify for long-term treatment.
The difference is worth real money. Short-term gains are stacked onto your other income and taxed at rates up to 37%. Long-term gains top out at 20%, and many people pay 0% or 15%. Selling a day too early can nearly double the tax on the same profit.
2026 Long-Term Rates and Income Thresholds
Long-term capital gains fall into three brackets: 0%, 15%, and 20%.3Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed The rate you pay depends on your taxable income and filing status. For 2026, the IRS thresholds are:4IRS. Revenue Procedure 2025-32 – 2026 Adjusted Items
- 0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
- 15% rate: taxable income above the 0% threshold up to $545,500 (single), $613,700 (joint), or $579,600 (head of household).
- 20% rate: taxable income above the 15% ceiling.
The threshold is based on total taxable income, not the gain alone. Wages, business income, and other earnings all count. A single filer with $40,000 in wages and a $15,000 long-term gain has $55,000 of total taxable income, so part of the gain lands in the 0% bracket and the rest is taxed at 15%.
Short-Term Rates
Short-term gains get no preferential treatment. They’re taxed at the same graduated rates as wages, which run from 10% to 37% in 2026.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A single filer with $200,000 in salary who realizes a $50,000 short-term gain pays at least 32% on that gain. Held one day longer to qualify as long-term, that same gain would have been taxed at 15%.
Collectibles and Depreciation Recapture
Not every long-term gain uses the 0/15/20 brackets. Gains from selling collectibles (coins, art, antiques, stamps, precious metals) are taxed at a maximum rate of 28%. If you claimed depreciation on rental or business real estate, the portion of your gain attributable to those deductions is taxed at a maximum of 25%.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses Gold coins or a rare painting held for decades still face a higher rate than a stock portfolio.
The 3.8% Net Investment Income Tax
Higher earners face an extra 3.8% surtax on investment income, capital gains included. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds:7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
- $250,000 for married filing jointly
- $200,000 for single or head of household
- $125,000 for married filing separately
These thresholds aren’t indexed to inflation, so more taxpayers cross them each year.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax For someone already in the 20% long-term bracket who also triggers the surtax, the effective federal rate on capital gains reaches 23.8%.
How Your Taxable Gain Is Calculated
Your taxable gain is the difference between what you received from the sale and your basis in the asset. Basis starts as the original purchase price.9Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property Cost Certain expenditures increase it over time. Buy a rental property for $300,000 and put $40,000 into a new roof and a renovated kitchen, and your adjusted basis becomes $340,000.10Office of the Law Revision Counsel. 26 USC 1011 – Adjusted Basis for Determining Gain or Loss Sell for $500,000 and your taxable gain is $160,000, not $200,000.
Transaction costs also come off the top. Brokerage commissions, legal fees, and transfer taxes tied to the sale reduce the amount realized.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses These add up in real estate. Keep records of every acquisition, improvement, and selling cost from the day you buy.
Inherited and Gifted Property
Inherited assets receive a stepped-up basis equal to fair market value on the date of death.11Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent If a parent bought stock for $10,000 in 1990 and it was worth $200,000 when they died, your basis is $200,000. Sell the next week for $201,000 and you owe tax on just $1,000. Decades of appreciation effectively escape income tax.
Gifts work the opposite way. When someone gives you an asset during their lifetime, you generally take their original basis.12Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust Using the same example, if the stock was gifted rather than inherited, your basis would be $10,000 and a sale at $201,000 would produce a $191,000 taxable gain. This is why highly appreciated assets are often held until death rather than gifted. If the asset has already declined below the donor’s basis, special rules limit any loss you can claim.
Using Losses to Reduce Your Tax
You’re taxed on net gains, not gross gains. Losses from other sales offset gains during the same year. If your losses exceed your gains, up to $3,000 of the excess ($1,500 if married filing separately) can be deducted against ordinary income like wages.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses Anything left over carries forward to future years indefinitely.13Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers A large loss in a bad year can reduce your taxes for many years to come.
The Wash Sale Rule
There’s a catch when you sell for a loss. If you buy a substantially identical security within 30 days before or after the sale, the IRS disallows the loss.14Office of the Law Revision Counsel. 26 USC 1091 – Loss from Wash Sales of Stock or Securities The disallowed amount is added to the basis of the replacement shares, but you lose the current-year deduction, which is usually the whole point. The 30-day window runs in both directions, creating a 61-day restricted period. Investors who want to lock in a loss and stay invested often buy a similar but not identical fund during the wait. Selling an S&P 500 index fund at a loss and buying a total stock market fund is a common approach, though the IRS hasn’t drawn clear lines around what qualifies as substantially identical among mutual funds and ETFs.
Ways to Avoid or Defer the Tax
Several rules let you skip or postpone capital gains tax in specific situations.
Selling Your Home
If you sell your main home, you can exclude up to $250,000 of gain from your income, or $500,000 if you’re married filing jointly.15Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain from Sale of Principal Residence 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. A partial exclusion may be available if you fall short due to a job relocation, health issue, or other unforeseen circumstance.
1031 Exchanges for Investment Real Estate
Real estate investors can defer gains by swapping one investment property for another through a like-kind exchange. Both properties must be held for business or investment; your personal home doesn’t qualify.16Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Since 2018, only real property qualifies. Stocks and equipment no longer do.
The timelines are strict. You have 45 days after selling to identify replacement properties in writing, and 180 days to close. A qualified intermediary must hold the sale proceeds throughout. Touching the money, even briefly, can disqualify the entire exchange and make the full gain immediately taxable.
Retirement Accounts
Buying and selling inside a traditional 401(k) or IRA doesn’t trigger capital gains tax. You pay ordinary income tax on withdrawals in retirement instead.17Internal Revenue Service. Roth Account in Your Retirement Plan With Roth accounts, contributions are after-tax, but qualified withdrawals in retirement (growth included) come out completely tax-free. Either way, capital gains tax as a separate category doesn’t apply to trades inside these accounts, which makes them well suited to assets you plan to trade frequently.
Reporting Your Gains
Capital gains and losses are reported on two forms. Form 8949 lists each transaction, separated into short-term (Part I) and long-term (Part II) sections, with the description, dates acquired and sold, sale price, and cost basis for every sale.18Internal Revenue Service. Instructions for Form 8949 Totals from Form 8949 flow onto Schedule D, which calculates your overall net gain or loss and the tax owed.
Your brokerage sends you a Form 1099-B reporting each sale, which supplies most of what you need. But 1099-B basis figures aren’t always right, especially if you transferred shares between brokerages, received gifted or inherited stock, or made wash sale adjustments. Review the reported basis carefully before filing. Errors here are one of the most common reasons people overpay.
Realized a large gain mid-year? Consider making an estimated tax payment to avoid an underpayment penalty at filing time. The IRS expects tax to be paid throughout the year, and a big fourth-quarter sale can create a surprise bill that regular paycheck withholding won’t cover.19Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc. Increasing W-2 withholding or sending a quarterly estimated payment can head the penalty off.
State Tax
Federal tax is only part of the bill. Most states also tax capital gains, typically at the same rate as other income. State rates run from 0% in states with no income tax to above 13% in the highest-tax states. A few states exempt certain gains or offer reduced rates for long-term holdings, but most treat capital gains the same as wages. Check your state’s rules before estimating what you’ll owe on a sale.
Penalties for Getting It Wrong
Failing to report gains accurately can trigger an accuracy-related penalty of 20% of the underpaid tax.20Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments The IRS receives copies of the same 1099-B forms your broker sends you, so unreported sales are easy for their matching systems to catch. Interest accrues from the original due date on top of the penalty. Clean records of every acquisition date, purchase price, improvement, and selling expense are the simplest defense.