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 and the same gain might cost you $0–$10,000 (at 0%–20%).

Long-term capital gains rates for 2026 are based on your total taxable income:

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.

High earners may also owe an additional 3.8% Net Investment Income Tax (NIIT) on top of their capital gains rate.

NIIT thresholds (2026):

• Single: applies to income over $200,000
• Married filing jointly: applies to income over $250,000

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.

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:

• 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 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 and owe zero capital gains tax. Investment properties (rentals) do not qualify for this exclusion.