Understanding Capital Gains
A capital gain occurs when you sell an asset for more than you paid (your "cost basis"). Capital gains are taxed differently than regular income, with major benefits for long-term holdings.
The opposite — selling for less than you paid — is a capital loss, which can offset gains and reduce your tax bill.
Short-Term vs Long-Term
| Type | Holding Period | Tax Rate |
|---|---|---|
| Short-Term | Less than 1 year | Ordinary income rates (10-37%) |
| Long-Term | 1 year or more | Preferential rates (0%, 15%, or 20%) |
Hold for 366 Days
2026 Long-Term Capital Gains Brackets
Single filers:
| Rate | Taxable Income | Notes |
|---|---|---|
| 0% | $0 - $48,350 | Pay no federal tax on gains! |
| 15% | $48,350 - $533,400 | Most taxpayers fall here |
| 20% | Over $533,400 | High earners only |
Married filing jointly:
| Rate | Taxable Income | Notes |
|---|---|---|
| 0% | $0 - $96,700 | Double the single threshold |
| 15% | $96,700 - $600,050 | Most married couples |
| 20% | Over $600,050 | High earners |
Net Investment Income Tax (NIIT)
High earners pay an additional 3.8% NIIT on investment income (including capital gains) above certain thresholds:
| Filing Status | NIIT Threshold |
|---|---|
| Single | $200,000 |
| Married Filing Jointly | $250,000 |
| Married Filing Separately | $125,000 |
NIIT Applies to Total Investment Income
Cost Basis
Your cost basis is what you paid for the investment, including:
- Original purchase price
- Transaction fees and commissions
- Reinvested dividends (if applicable)
- Adjustments for stock splits or mergers
Higher cost basis = lower gain = less tax. Keep records of all purchases!
Tax-Loss Harvesting
Tax-loss harvesting is selling investments at a loss to offset gains:
- Losses offset gains dollar-for-dollar
- Short-term losses offset short-term gains first
- Excess losses can offset up to $3,000 of ordinary income
- Remaining losses carry forward indefinitely
Wash Sale Rule
State Capital Gains Taxes
Many states tax capital gains as ordinary income. Notable exceptions:
| State | Capital Gains Treatment |
|---|---|
| California | Taxed as ordinary income (up to 13.3%) |
| New York | Taxed as ordinary income (up to 10.9%) |
| Texas, Florida, Nevada | No state income tax |
| Washington | 7% on gains over $250,000 (new) |
Strategies to Reduce Capital Gains Tax
- Hold for long-term (1+ year) to get preferential rates
- Harvest losses to offset gains
- Time sales in lower-income years
- Donate appreciated assets to charity
- Use 0% bracket if in low-income year
- Consider Qualified Opportunity Zone investments
- Leave appreciated assets to heirs (step-up in basis)
Frequently Asked Questions
Q: When do I owe capital gains tax?
A: Tax is owed when you sell (realize the gain). Unrealized gains in your portfolio aren't taxed until you sell.
Q: How do I calculate holding period?
A: Start counting from the day AFTER you purchase. If you bought on January 1, 2025, it becomes long-term on January 2, 2026.
Q: What about cryptocurrency?
A: Crypto is taxed like property. Same short-term vs long-term rules apply. Every trade is a taxable event.
Q: Are there exclusions?
A: Yes! Home sale gains up to $250K ($500K if married) are excluded if it was your primary residence for 2+ of last 5 years.
Q: How do dividends affect this?
A: Qualified dividends are taxed at LTCG rates. Non-qualified dividends are taxed as ordinary income. Capital gains are separate.
Q: What if I inherited the investment?
A: Inherited assets get a 'stepped-up' basis to fair market value at death. This can eliminate all prior gains!
Reporting Capital Gains
- Brokerage sends Form 1099-B with sales info
- Report on Schedule D of tax return
- Form 8949 for details of each transaction
- Keep records of cost basis (especially for old purchases)
This calculator provides estimates based on 2026 tax rates. Actual tax owed depends on your complete tax situation. Consult a tax professional for personalized advice.