How capital gains work
Almost everything you own for personal use or investment is a capital asset: stocks, bonds, fund shares, a home, a car, collectibles and cryptocurrency. Sell or exchange one and subtract your adjusted cost basis from the amount realized, meaning the price minus selling costs. A positive result is a capital gain; a negative one is a capital loss.
Until you sell, a rise in value is an unrealized, or paper, gain, and it is generally not taxed. Selling, swapping one investment for another or spending crypto realizes it.
Two limits catch people out. Losses on personal-use property, such as your home or car, are not deductible, though gains on them are taxable. And trades inside a 401(k) or IRA create no capital gains: traditional withdrawals are taxed as ordinary income, and qualified Roth withdrawals are tax-free. Capital gains tax falls on a taxable brokerage account, real estate and other assets held outside them.
Short-term and long-term gains
The tax code sorts every gain and loss by holding period: more than one year is long-term, one year or less is short-term. Count from the day after you acquired the asset through the day you sell.
The label decides the rate. Long-term capital gains qualify for federal rates of 0%, 15% or 20%, while short-term capital gains are taxed like wages, at 10% to 37%. Some assets run on their own clock: inherited property is always long-term, and mutual fund capital gain distributions are long-term however long you have owned the fund.
How gains and losses are netted
You do not pay tax on each sale separately. At year-end, Schedule D nets all of your sales in a fixed order, and only the result is taxed. That is why a loss realized in December can cut the tax on a gain taken in March, and why tax-loss harvesting works. Buy the same or substantially identical shares within 30 days before or after a loss sale, though, and the wash sale rule disallows the loss for now.
- Net short-term gains against short-term losses, including any short-term loss carried over from earlier years.
- Net long-term gains against long-term losses, including long-term carryovers.
- If one side is a gain and the other a loss, combine them. A net long-term gain left after any net short-term loss is the net capital gain that gets the lower rates.
- A remaining net short-term gain is taxed at ordinary rates.
- A net loss offsets up to $3,000 of other income a year ($1,500 if married filing separately). The rest becomes a capital loss carryover with no expiration date.
Capital gains tax rates for 2026
Long-term gains and qualified dividends stack on top of your ordinary income and are taxed at 0%, 15% or 20%, depending on where total taxable income lands. For 2026 the 0% rate applies up to $49,450 of taxable income for single filers and $98,900 for joint filers, and 20% starts above $545,500 and $613,700. Short-term gains simply join ordinary income at your bracket rates.
A few long-term gains have higher caps: 28% on collectibles such as coins and art and on the taxable part of qualified small business stock gain, and 25% on unrecaptured section 1250 gain, the depreciation portion of a real estate sale. The 3.8% net investment income tax applies on top once modified AGI passes $200,000 single or $250,000 joint, thresholds not indexed for inflation. Your state may tax the gain as well.
Ways to reduce or defer capital gains tax
The biggest lever is time. Holding past the one-year mark moves a gain from ordinary rates to the preferential ones, and holding for life can erase it, because heirs generally receive a step-up in basis to the value at death. Most other tools defer the tax rather than cancel it, and each comes with conditions, so the best choice depends on how your income this year compares with the years ahead.
- Realize gains in years when they fall in the 0% band, known as tax-gain harvesting.
- Give appreciated shares held over a year to a charity or a donor-advised fund instead of cash, so the gain is never taxed.
- Exclude up to $250,000 of gain on your main home, or $500,000 on a joint return, with the home sale exclusion.
- Defer gain on investment real estate by trading into like-kind property through a 1031 exchange.
- Choose which lots to sell, favoring high-basis shares, and keep tax-inefficient investments in sheltered accounts.
Illustrative numbers
A single filer nets three sales in 2026
- Amount realized
- Sale price or value received, minus selling costs such as commissions
- Adjusted basis
- What you paid plus purchase costs and improvements, minus depreciation and return of capital
Hold the asset more than one year for long-term treatment; a negative result is a capital loss.
Long-term gain, shares held three years$12,000
Short-term gain, shares held eight months$1,500
Short-term loss, fund held five months−$4,000
Net short-term result−$2,500
Net capital gain, taxed at long-term rates$9,500
Federal tax at 15%, with $60,000 of other taxable income$1,425
The short-term loss wipes out the short-term gain, and the $2,500 left over reduces the long-term gain. With other taxable income already above the $49,450 top of the 0% band, the $9,500 is taxed at 15%. Without the losing sale, tax would be $2,130: $1,800 on the long-term gain plus $330 on the short-term gain at 22%.
At a glance
How different capital gains are taxed federally (2026)
| Type of gain | Holding period | Federal rate |
|---|---|---|
| Stocks, bonds, funds, crypto | More than 1 year | 0%, 15% or 20% |
| Stocks, bonds, funds, crypto | 1 year or less | Ordinary rates, 10%–37% |
| Collectibles such as coins or art | More than 1 year | Up to 28% |
| Real estate depreciation (unrecaptured section 1250 gain) | More than 1 year | Up to 25% |
| Net investment income tax | Any | Extra 3.8% above MAGI of $200,000 single, $250,000 joint |
Put it in your plan
Capital gains in MoneyWhatIf
In MoneyWhatIf, each brokerage account carries a cost basis, and a withdrawal takes a proportional slice of it, so its taxable gain is withdrawal × (value − basis) ÷ value. Modeled gains are priced on the long-term 0%, 15% and 20% ladder stacked above ordinary taxable income, with the net investment income tax and state treatment added. Sales below basis realize losses that net against gains and carry forward, though the model does not deduct them from ordinary income. A primary-home sale applies the $250,000 or $500,000 exclusion, and Tax Planning can test harvesting gains in low-rate years.
Common questions
Capital gains FAQs
Do you pay capital gains tax if you reinvest the money?
Yes. Selling is what triggers the tax, so reinvesting the proceeds, even in a similar fund on the same day, does not undo the gain. The main exceptions are specific deferral rules, such as a 1031 exchange of investment real estate, and trades inside retirement accounts, which never create capital gains. Fund distributions that are automatically reinvested are also taxable in the year they are paid.
Do I pay capital gains tax when I sell my house?
Often not on all of it. If you owned the home and lived in it as your main residence for at least two of the five years before the sale, you can exclude up to $250,000 of gain, or $500,000 on a joint return, as long as you have not used the exclusion in the prior two years. Gain above that is taxed as a capital gain, and a loss on your home is not deductible.
Do capital gains count as income?
Yes. Even when a long-term gain is taxed at 0%, it is part of your adjusted gross income. That matters because AGI and its modified versions drive other costs: how much of your Social Security is taxable, whether you qualify for ACA premium credits, and Medicare IRMAA surcharges two years later. A large sale can raise several of these at once.
When do you pay capital gains tax?
For the year you sell. Each sale goes on Form 8949 and Schedule D with that year’s return, using the Form 1099-B or 1099-DA your broker sends. Withholding does not rise to cover a big gain, so a large sale may call for an estimated tax payment. You avoid an underpayment penalty if withholding and payments cover 90% of this year’s tax or 100% of last year’s, or 110% if last year’s AGI topped $150,000 ($75,000 married filing separately).
Is cryptocurrency subject to capital gains tax?
Yes. The IRS treats digital assets such as bitcoin as property, not currency, so selling crypto, trading one coin for another or spending it on goods is a sale with a gain or loss measured from your basis. Holding more than one year earns long-term rates. Brokers report digital asset sales on Form 1099-DA, and they must report basis for certain transactions on or after January 1, 2026.