Capital Gains Tax Explained: How Investments Are Taxed

What Are Capital Gains?

A capital gain is the profit you earn when you sell a capital asset — stocks, bonds, mutual funds, real estate, cryptocurrency, collectibles, or other investment property — for more than you paid for it. The amount you paid (including commissions and certain fees) is called your cost basis.

Simple formula: Capital Gain = Sale Price − Cost Basis

If you bought 100 shares of a stock at $50 each ($5,000 total) and sold them at $80 each ($8,000 total), your capital gain is $3,000. You don't owe taxes on the gain until you sell — unrealized gains (increases in value you haven't locked in by selling) are not taxed.

Capital losses occur when you sell for less than you paid. Losses can offset gains and reduce your tax bill — a strategy called tax-loss harvesting, covered in detail below.

Short-Term vs. Long-Term: The One-Year Rule

The tax treatment of your gain depends entirely on how long you held the asset before selling. This single factor can dramatically change your tax bill.

Short-term capital gains: Assets held for one year or less before selling. Taxed at your ordinary income tax rate — the same rate that applies to your wages. In 2026, this can be as high as 37% for the highest earners.

Long-term capital gains; Assets held for more than one year before selling. Taxed at significantly lower preferential rates: 0%, 15%, or 20% based on your taxable income.

Concrete example of the difference: You bought stock for $10,000 and it's now worth $15,000 — a $5,000 gain. You're in the 24% ordinary income bracket.

• If you sell after 11 months: short-term gain, taxed at 24% → $1,200 tax
• If you wait one more month (hold for 13 months): long-term gain, taxed at 15% → $750 tax
• Waiting 30 days saves you $450.

This is why the "hold for at least a year" advice is so widely given — for most investors in the 22% or 24% bracket, the long-term rate of 15% represents a 7–9 percentage point savings on every gain.

2026 Capital Gains Tax Rates

Long-Term Capital Gains Rates for 2026

Key insight on the 0% bracket: If your taxable income (after deductions) is under approximately $47,000 as a single filer or $94,000 married, you pay zero federal capital gains tax on long-term gains. This creates a powerful tax planning opportunity: in low-income years (career breaks, early retirement, or part-time work years), you can strategically realize long-term gains at 0%.

Short-term capital gains are taxed at your ordinary income rate — the same brackets as wages (10%, 12%, 22%, 24%, 32%, 35%, 37%). There are no special rates for short-term gains.

How to Calculate Your Capital Gain or Loss

The IRS requires you to report every sale of a capital asset on Schedule D of your tax return. Brokers are required to provide Form 1099-B showing proceeds from sales, and most now also report cost basis.

The calculation:

1. Determine your proceeds: The total amount you received from the sale (sale price × shares sold, net of any broker commissions).
2. Determine your cost basis: What you originally paid for the asset, including commissions. For reinvested dividends, each reinvestment creates a new lot with its own basis and holding period.
3. Calculate the gain or loss: Proceeds minus cost basis.
4. Determine the holding period: From the date of purchase to the date of sale. Exactly 366 days or more = long-term.
5. Net your gains and losses: Short-term gains/losses net against each other; long-term gains/losses net against each other. Then any net short-term loss can offset long-term gains, and vice versa.

Cost Basis Methods: FIFO, Specific ID, and Average Cost

When you've bought the same security multiple times at different prices, you must choose which shares you're selling. This choice directly impacts your tax bill.

Why specific identification matters: Suppose you bought 200 shares total: 100 shares at $30 (long-term lot) and 100 at $70 (short-term lot). The current price is $80. If you sell 100 shares using FIFO, you'd sell the $30 lot for a $5,000 long-term gain (taxed at 15%). Using specific identification, you could sell the $70 lot for a $1,000 short-term gain — or even a short-term loss if the market moved against you. The choice can mean thousands of dollars in tax savings.

Tax-Loss Harvesting: Turning Losses Into Tax Savings

Tax-loss harvesting is the practice of selling investments at a loss to offset taxable capital gains — and potentially some ordinary income. It's one of the most valuable tax strategies available to taxable account investors.

How it works:

• You have a $10,000 gain from selling Stock A (long-term, 15% tax owed = $1,500)
• You also hold Stock B, which has declined $8,000 from your purchase price
• You sell Stock B, "harvesting" an $8,000 loss
• The $8,000 loss offsets $8,000 of the $10,000 gain — you now owe tax only on $2,000
• Tax owed drops from $1,500 to $300 — a $1,200 tax saving

If losses exceed gains: Up to $3,000 of net capital losses can be deducted against ordinary income each year (e.g., salary). Remaining losses carry forward to future tax years indefinitely.

The wash sale rule: You cannot repurchase the same or a "substantially identical" security within 30 days before or after the sale that created the loss. If you do, the IRS disallows the loss. The solution: purchase a similar but not identical security (e.g., sell SPY and buy VOO, or sell a Vanguard fund and buy an equivalent iShares fund) to maintain market exposure while satisfying the wash sale rule.

The Net Investment Income Tax (NIIT)

High earners face an additional 3.8% Net Investment Income Tax (NIIT) on investment income above certain thresholds. This tax was introduced by the Affordable Care Act and applies to capital gains, dividends, and other investment income.

NIIT applies when your modified adjusted gross income (MAGI) exceeds:

• $200,000 (single filers)
• $250,000 (married filing jointly)
• $125,000 (married filing separately)

For affected taxpayers, the effective long-term capital gains rate becomes 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) at the highest tier. This makes tax-loss harvesting and tax-advantaged account strategies even more valuable for high earners.

Capital Gains on Real Estate: The Home Sale Exclusion

The primary residence exclusion is one of the most valuable tax breaks in the tax code. If you've owned and lived in your home for at least 2 of the 5 years before selling, you can exclude up to $250,000 of gain ($500,000 married filing jointly) from capital gains tax entirely.

Example: You bought a home for $400,000 and sold it for $700,000 (a $300,000 gain). As a single filer who has lived there for 3 years, you exclude $250,000 and owe tax only on $50,000. At 15%, that's $7,500 — versus $45,000 if no exclusion applied.

Investment properties (rental real estate) do not qualify for the exclusion. Gains on rental properties sold are taxed at long-term capital gains rates, and you also face depreciation recapture — the accumulated depreciation deductions you took during ownership are taxed at up to 25% upon sale.

Cryptocurrency and Capital Gains

The IRS treats cryptocurrency as property, not currency. Every crypto sale, trade, or use is a taxable event that may generate a capital gain or loss. This includes:

• Selling crypto for dollars
• Trading one cryptocurrency for another (e.g., Bitcoin for Ethereum)
• Using crypto to purchase goods or services
• Receiving crypto as payment for services (taxed as ordinary income at receipt, then capital gain on subsequent sale)

The same short-term/long-term holding period rules apply. Crypto held for over a year qualifies for long-term rates; shorter holds are taxed as ordinary income. Given the volatility of crypto prices, tax-loss harvesting opportunities arise frequently — and unlike stocks, crypto is not subject to the wash sale rule (though this may change with future legislation).

Strategies to Minimize Capital Gains Taxes

Last verified: April 2026. Tax rates reflect 2026 IRS tables adjusted for inflation. Tax situations vary — consult a qualified tax professional for personalized advice.