Capital Gains Tax Explained: Short-Term vs Long-Term

A capital gain is the profit you make when you sell an asset for more than you paid for it. Capital gains tax is what you owe the IRS on that profit.

The tax rate depends on two factors: how long you held the asset and your total taxable income.

Short-term capital gains — assets held for 1 year or less — are taxed as ordinary income at your regular marginal tax rate (10%–37%).

Long-term capital gains — assets held for more than 1 year — receive preferential tax rates of 0%, 15%, or 20%, depending on your income.

This distinction matters enormously. A $50,000 gain on a stock held for 11 months could cost you $11,000–$18,500 in tax (at 22%–37%). Wait one more month to hold it for a full year, and the same gain might cost you $0–$10,000 (at 0%–20%), depending on your income.

Long-term capital gains rates for 2026 are based on your total taxable income (not just the gain amount):

Single filers:

• 0% rate: taxable income up to $48,350
• 15% rate: taxable income $48,351–$533,400
• 20% rate: taxable income over $533,400

Married filing jointly:

• 0% rate: taxable income up to $96,700
• 15% rate: taxable income $96,701–$600,050
• 20% rate: taxable income over $600,050

Important: Your capital gain is "stacked on top of" your ordinary income when determining which rate applies. So if a single filer has $40,000 in ordinary income and a $20,000 long-term capital gain, the $40,000 falls in the 0% zone and $8,350 of the gain falls in the 0% zone — but the remaining $11,650 of the gain falls in the 15% zone.

High earners may also owe an additional 3.8% Net Investment Income Tax (NIIT) on top of their capital gains rate. This tax was introduced by the Affordable Care Act to help fund Medicare.

NIIT thresholds (2026):

• Single: applies to the lesser of net investment income or income over $200,000
• Married filing jointly: applies to the lesser of net investment income or income over $250,000

Investment income subject to NIIT includes capital gains, dividends, interest, rental income, and royalties. It does NOT apply to wages, salary, or business income from active participation.

For a single filer earning $250,000 with a $100,000 long-term capital gain: they owe 20% + 3.8% = 23.8% on that gain after accounting for thresholds.

Tax-loss harvesting is a strategy where you deliberately sell investments at a loss to offset capital gains and reduce your tax bill.

How it works:

• You have a $30,000 long-term gain on Stock A
• You have a $10,000 unrealized loss on Stock B
• You sell Stock B to realize the $10,000 loss
• Your net taxable gain is reduced to $20,000
• At 15% long-term rate, you save $1,500 in tax

Rules to know:

• Capital losses first offset capital gains of the same type (long-term vs short-term)
• Excess losses offset the other type of gain
• Up to $3,000 of net capital losses can offset ordinary income per year
• Unused losses carry forward to future years indefinitely
• The wash-sale rule prevents you from buying back the same or substantially identical security within 30 days before or after the sale

Real estate has a special exclusion that benefits many homeowners. If you sell your primary residence:

• Single filers can exclude up to $250,000 of gain from tax
• Married filing jointly can exclude up to $500,000 of gain

To qualify, you must have owned and lived in the home as your primary residence for at least 2 of the last 5 years before the sale.

Example: You bought a home for $300,000 and sell it for $650,000 — a $350,000 gain. As a married couple, you exclude $350,000 (under the $500,000 limit) and owe zero capital gains tax. As a single filer, you exclude $250,000 and owe capital gains tax on the remaining $100,000 gain.

Investment properties (rentals) do not qualify for this exclusion and are taxed at long-term capital gains rates plus potential depreciation recapture (taxed at up to 25%).