Anyone who sells a capital asset for more than they paid for it generally has to pay federal capital gains tax on the profit. That includes individual investors, homeowners, landlords, C-corporations, trusts, estates, mutual fund shareholders, and even some people who never set foot in the United States. Each group follows different rules, and several important exemptions can reduce or eliminate the bill entirely.
Individuals Who Sell Assets at a Profit
If you sell a capital asset for more than your cost basis, you owe tax on the gain. You report it on Schedule D of Form 1040.1Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses This applies whether you sell stocks, bonds, mutual fund shares, a rental property, artwork, or cryptocurrency. The gain equals what you received from the sale minus your cost basis, which is generally the original purchase price adjusted for things like improvements or transaction fees.
How long you held the asset determines the rate. Own it for a year or less and the profit is a short-term capital gain, taxed at your ordinary income rate, which reaches 37% for the top bracket in 2026. Hold it for more than a year and the profit qualifies as a long-term capital gain, taxed at 0%, 15%, or 20% depending on your taxable income. Collectibles like art, antiques, coins, and precious metals are taxed at a maximum long-term rate of 28%.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Digital assets count. The IRS treats cryptocurrency, tokens, and NFTs as property, so selling, exchanging, or trading one digital asset for another is a taxable event based on fair market value at the time of the transaction. Every crypto-to-crypto trade is its own taxable event, not just cashing out to dollars. Rewards from mining or staking are taxed as ordinary income when received, and any later sale creates a separate capital gain or loss.3Internal Revenue Service. Digital Assets
Businesses and Trusts
C-corporations pay tax on their capital gains at the corporate level, currently a flat 21%. S-corporations and partnerships don’t pay at the entity level; the gains flow through to each owner’s personal return and are taxed at individual rates.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses
Trusts and estates report capital gains on Form 1041.4Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 If the gain is distributed to beneficiaries, they pay the tax on their share, reported to them on a Schedule K-1. If the trust keeps the gain, the trust itself owes tax, and the brackets are compressed sharply. For 2026, a trust hits the 20% long-term rate on taxable income above just $16,250.5Internal Revenue Service. Rev. Proc. 2025-32 – 2026 Adjusted Items
Mutual Fund Shareholders Who Didn’t Sell
You can owe capital gains tax on a mutual fund even in a year when you didn’t sell a single share. When the fund itself sells investments in its portfolio at a profit, it passes those gains through to shareholders as capital gain distributions. The distributions arrive on Form 1099-DIV and are treated as long-term regardless of how long you’ve owned shares in the fund.6Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.)
Citizens Abroad, Resident Aliens, and Nonresidents
U.S. citizens owe capital gains tax on worldwide income no matter where they live or where the asset is located. A citizen abroad who sells foreign property still reports the gain on a federal return.7Internal Revenue Service. U.S. Citizens and Resident Aliens Abroad The Foreign Tax Credit prevents double taxation on gains already taxed by another country.8Internal Revenue Service. Foreign Tax Credit
Resident aliens — non-citizens who hold a green card or meet the substantial presence test — are taxed on worldwide income the same as citizens. The substantial presence test generally requires 31 days in the U.S. during the current year and 183 days over a three-year weighted period.9Internal Revenue Service. Substantial Presence Test
Nonresident aliens face narrower obligations. Gains from selling U.S. real property interests are taxable under the Foreign Investment in Real Property Tax Act.10Office of the Law Revision Counsel. 26 USC 897 – Disposition of Investment in United States Real Property Most other capital gains on personal property are exempt for nonresidents. However, a nonresident who is physically present in the U.S. for 183 days or more during the tax year owes a flat 30% tax on net capital gains from U.S. sources.11Office of the Law Revision Counsel. 26 USC 871 – Tax on Nonresident Alien Individuals
Citizens who renounce citizenship and long-term green card holders who give it up may owe an exit tax. Under the mark-to-market rules, a “covered expatriate” is treated as having sold all worldwide assets at fair market value the day before expatriation. An inflation-adjusted portion of the gain is excluded ($890,000 for 2025); anything above that is taxable.12Internal Revenue Service. Instructions for Form 8854
Who Is Exempt or Gets a Major Exclusion
Home Sellers Under the Section 121 Exclusion
Homeowners who sell their primary residence can exclude up to $250,000 of gain if single or $500,000 if married filing jointly.13Office 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 need to be consecutive. For the full $500,000 married exclusion, both spouses must meet the use test and at least one must meet the ownership test, and neither can have claimed the exclusion on another home within the past two years. Any profit above the exclusion is taxed at the standard long-term rate.
If you have to sell before hitting the two-year mark because of a job move, health reasons, or certain unforeseen circumstances, a partial exclusion is available, prorated by the fraction of the two-year period you actually lived there. A single filer who lived in the home for one year before a qualifying job change could exclude up to $125,000.
Heirs Receiving a Step-Up in Basis
When you inherit an asset, your cost basis is generally reset to fair market value on the date the previous owner died — not what they originally paid.14Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent If a parent bought stock for $10,000 decades ago and it was worth $100,000 the day they died, your basis as the heir is $100,000. Selling shortly after for $100,000 produces zero taxable gain. Any gain you do realize above the stepped-up value is reported on Schedule D and Form 8949 and is automatically treated as long-term.15Internal Revenue Service. Gifts and Inheritances
Qualified Small Business Stock Investors
Investors who buy stock in a qualifying small business at original issuance and hold it long enough can exclude some or all of the gain under Section 1202. The company must be a domestic C-corporation with gross assets of $50 million or less when the stock is issued. The exclusion scales with the holding period: 50% at three years, 75% at four years, and 100% at five or more years.16Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain from Certain Small Business Stock The maximum excludable gain per issuer is $10 million for stock acquired on or before July 4, 2025, and $15 million for stock acquired after that date (or ten times your adjusted basis, whichever is greater). Shares bought on the open market don’t qualify.
Anyone With Offsetting Capital Losses
Selling investments at a loss reduces your taxable gains dollar for dollar. Short-term losses first offset short-term gains, and long-term losses offset long-term gains. If you still have a net loss after netting, you can deduct up to $3,000 of it ($1,500 if married filing separately) against ordinary income. Anything unused carries forward indefinitely for individuals.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses17Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers
When There’s No Sale, There’s No Tax Yet
An investment that has doubled in value inside your account is an unrealized gain, and it stays untaxed as long as you hold it. Capital gains tax attaches only to a realization event — usually a sale or exchange, sometimes an involuntary conversion like an insurance payout after property is destroyed.18Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss
Giving an asset away generally doesn’t create a gain for the giver. The recipient takes over the original cost basis and will owe tax when they eventually sell. Donating an appreciated asset to a qualifying charity can let you avoid recognizing the gain entirely.
The 3.8% Surtax for Higher Earners
Being inside the standard capital gains brackets isn’t the whole picture for higher-income taxpayers. The Net Investment Income Tax adds 3.8% on top of the regular rate, applied to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds these thresholds: $200,000 for single or head-of-household filers, $250,000 for married filing jointly, and $125,000 for married filing separately.19Internal Revenue Service. Net Investment Income Tax Those thresholds don’t adjust for inflation, so more taxpayers fall inside them each year. A married couple with $300,000 of modified adjusted gross income and $80,000 of capital gains would owe the 3.8% surtax on $50,000, pushing the effective federal rate on the affected gains above 23%.
What Happens If You Don’t Report
The IRS failure-to-pay penalty is 0.5% of the unpaid tax for each month or partial month the balance remains outstanding, capped at 25%. Interest accrues on top. Setting up an approved payment plan cuts the monthly rate to 0.25%. Separate accuracy-related penalties can apply if the IRS finds you substantially understated income or were negligent.20Internal Revenue Service. Failure to Pay Penalty
State tax is a separate layer. Most states tax capital gains, typically at the same rate as other income. A handful impose no income tax at all; others reach as high as 13% on long-term gains. Adding state to federal gives a more accurate picture of what a sale will actually cost you.