What Is Long-Term Capital Gains Tax? Rates, Surtax, and Exemptions

Long-term capital gains tax is the federal tax on the profit from selling an asset you held for more than one year, and for 2026 it’s charged at 0%, 15%, or 20% depending on your taxable income and filing status. Higher earners may owe an additional 3.8% surtax on top. These rates run well below the ordinary income rates that apply to wages and to gains on assets held a year or less, which is why the holding period does so much work in your tax bill.

What Makes a Gain Long-Term

You have to hold the asset for more than one year before selling. The clock starts the day after you acquire it and includes the day you sell.¹ Sell on the one-year anniversary and you’re one day short. Sell the day after, and you qualify. Buy stock on March 1, 2025, and the earliest long-term sale date is March 2, 2026.

Anything sold at or before that one-year mark is a short-term gain, taxed at your ordinary income rate, which tops out at 37%. On a large gain, the difference between day 365 and day 366 can run into thousands of dollars.

Inherited property is the major exception. If you receive an asset from someone who has died, the tax code treats it as long-term no matter how briefly the person owned it or how soon you sell after inheriting.²

2026 Federal Rates

Long-term gains are taxed at three rates. Which applies depends on your total taxable income and filing status. For 2026, the IRS set these thresholds:³

0% rate: taxable income up to $49,450 (single), $98,900 (married filing jointly), or $66,200 (head of household).
15% rate: taxable income from the 0% ceiling up to $545,500 (single), $613,700 (married filing jointly), or $579,600 (head of household).
20% rate: taxable income above the 15% ceiling.

These thresholds adjust for inflation each year.

How Gains Stack on Your Other Income

The bracket that applies to your gain isn’t based on the gain alone. Ordinary income fills the brackets first, and long-term gains sit on top. Say you’re single with $40,000 in wages and a $20,000 long-term gain. Your wages use $40,000 of the 0% bracket, leaving $9,450 of room before the 15% threshold. The first $9,450 of the gain is taxed at 0%, and the remaining $10,550 at 15%.

That stacking is why a retiree with modest income can sell substantial investments at 0%, while a high earner sees most gains taxed at 15% or 20%.

The 3.8% Surtax for Higher Earners

On top of the standard rates, higher-income taxpayers owe an additional 3.8% called the Net Investment Income Tax. It applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds these thresholds:⁴

Single or head of household: $200,000
Married filing jointly: $250,000
Married filing separately: $125,000

These thresholds are not adjusted for inflation.⁵ They’ve held at the same levels since the tax took effect in 2013, so inflation gradually pulls more taxpayers into its reach. A married couple with $300,000 of income and a $100,000 long-term gain would owe 3.8% on the lesser of $100,000 (their investment income) or $50,000 (the amount over $250,000), adding $1,900 to the bill. Combined with the 20% rate, the effective top federal rate on long-term gains is 23.8%.

Higher Rates on Collectibles and Depreciated Real Estate

Two categories of long-term gains don’t get the standard 0/15/20% treatment.

Gains from selling collectibles like art, coins, gems, stamps, antiques, precious metals, and wine collections are taxed at a maximum rate of 28%.⁶ If your ordinary rate is lower, you pay that instead, but higher earners lose the 20% ceiling they’d get on stock gains.

For rental or business real estate on which you’ve claimed depreciation, the portion of your gain attributable to that depreciation is taxed at a maximum 25% rate.⁶ Only the amount above the depreciation recapture gets the standard long-term rates. Landlords who’ve been deducting depreciation for years sometimes underestimate how much of their sale profit falls into this higher bucket.

Figuring the Gain

Your taxable gain is the difference between what you received from the sale and your adjusted basis. Getting the basis right is where most of the work happens, and where most mistakes cost people money.

Cost Basis

Basis starts with what you originally paid, including sales tax and other purchase costs.⁷ For stocks and bonds, add commissions or transfer fees paid when buying. For real estate, add closing costs, title insurance, recording fees, and the cost of significant improvements like a new roof or a kitchen renovation.⁸ Routine maintenance and repairs do not increase your basis.

Every dollar you add to your basis is a dollar off your taxable gain. Keeping receipts for home improvements is the kind of dull record-keeping that pays off at sale time.

Step-Up in Basis for Inherited Property

When you inherit an asset, your basis is not what the deceased person originally paid. It resets to the asset’s fair market value on the date of death.⁹ If your parent bought stock for $10,000 in 1990 and it was worth $200,000 when they died, your basis is $200,000. Sell it the next week for $201,000 and your taxable gain is $1,000. The $190,000 of appreciation during your parent’s lifetime is never taxed.

This differs from receiving an asset as a gift during someone’s lifetime, where you take over the giver’s original basis.

Sale Proceeds

Your proceeds are the total the buyer pays minus your direct selling costs. For real estate, subtract agent commissions, transfer taxes, and any closing credits you gave the buyer. For stocks, subtract brokerage fees on the sell side. The gap between net proceeds and adjusted basis is your capital gain.

Losses Reduce Your Gains

You don’t pay tax on gross gains. Losses from other sales reduce your taxable gains dollar for dollar. Long-term losses first offset long-term gains, and short-term losses first offset short-term gains. Any remaining net loss from one category then offsets gains in the other.⁶

If losses exceed gains, you can deduct the excess against ordinary income, but only up to $3,000 per year ($1,500 if married filing separately).¹⁰ That cap feels small against a $50,000 loss. Unused losses carry forward indefinitely, applying against future gains and shaving $3,000 off ordinary income each year until used up.¹¹

The Wash Sale Trap

If you sell an investment at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the IRS disallows the loss.¹² The 61-day window (30 days before, the sale day, 30 days after) prevents you from harvesting a tax loss while keeping the same position. The disallowed loss gets added to the basis of the replacement shares, so it isn’t lost forever, but you don’t get the deduction in the year you expected.

Year-end is when this rule catches people most often. Selling a losing stock on December 20 and buying it back on January 5 triggers the rule.

Selling Your Home

The sale of a primary residence is the most common capital gains event for most Americans, and the tax code provides the most generous break here. You can exclude up to $250,000 of gain if you’re single, or $500,000 if you’re married filing jointly.¹³ For most homeowners, that wipes out the entire taxable gain.

To qualify, you must have owned and used the home as your primary residence for at least two of the five years before the sale.¹⁴ The two years don’t need to be consecutive. For couples claiming the $500,000 exclusion, either spouse can meet the ownership requirement, but both must meet the use requirement. If you fall short of two years because you moved for work, health reasons, or unforeseen circumstances, you can claim a partial exclusion proportional to the time you did live there.

A surviving spouse who sells within two years of their partner’s death can still claim the full $500,000 exclusion on an individual return, provided the ownership and use requirements were met before the death.¹³

Deferring the Tax on Investment Real Estate

If you sell investment or business real estate, you can defer the entire gain by reinvesting the proceeds into similar real property through a Section 1031 exchange. The gain isn’t forgiven. Your basis in the new property carries over from the old one, so tax comes due when you eventually sell without doing another exchange.¹⁵

The timelines are strict. You have 45 days after selling the relinquished property to identify potential replacements and 180 days to close on one of them.¹⁵ Miss either deadline and the exchange fails, making the full gain taxable in the year of sale. Since 2018, like-kind exchanges apply only to real property. You cannot use them to defer gains on equipment, vehicles, artwork, or cryptocurrency.

Reporting the Sale

You report capital gains on two forms. Form 8949 lists each individual sale with the asset description, dates acquired and sold, proceeds, and basis.¹⁶ Totals from Form 8949 flow onto Schedule D of your Form 1040, which calculates your net gain or loss.¹⁷

Your brokerage will send a Form 1099-B reporting proceeds from securities sales, and many brokers now report cost basis as well. Check those figures against your own records, especially for shares you’ve held for years or transferred between accounts. Brokers sometimes get basis wrong on transferred shares, and you’re the one who pays if the reported figure is too low.

Estimated Payments After a Large Gain

If you sell a highly appreciated asset mid-year, don’t wait until April to deal with it. The IRS expects you to pay taxes as you earn income. You generally need estimated payments if you expect to owe at least $1,000 after withholding and credits, and your withholding won’t cover at least 90% of your current-year tax or 100% of last year’s tax (110% if your prior-year AGI exceeded $150,000).¹⁸ Miss those safe harbors and you’ll owe an underpayment penalty on top of the tax.

You have options. Increase your estimated payment for the quarter when the gain occurred, or if you have a job, bump up your W-4 withholding for the rest of the year. The annualized income installment method lets you match estimated payments to the quarter you actually received the income, avoiding penalties for earlier quarters.

State Taxes Add to the Bill

Federal tax is only part of the picture. Most states tax capital gains as ordinary income at their standard state income tax rates, which run from roughly 3% to over 13% depending on where you live. A handful of states impose no income tax at all, meaning no state-level capital gains tax either. One state applies a separate capital gains tax only above a high income threshold. Your state of residence changes the total meaningfully, so budget for it before you sell.

1
Internal Revenue Service. FS-2007-19 – Reporting Capital Gains
2
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
3
Internal Revenue Service. Revenue Procedure 2025-32
4
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
5
Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
6
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
7
Internal Revenue Service. Topic No. 703 – Basis of Assets
8
Internal Revenue Service. Publication 551 (12/2025) – Basis of Assets
9
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
10
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
11
Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
12
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
13
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
14
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
15
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use in Trade or Business
16
Internal Revenue Service. Instructions for Form 8949 (2025)
17
Internal Revenue Service. Form 8949 (2025) – Sales and Other Dispositions of Capital Assets
18
Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.