What are Capital Gains?

A capital gain is the profit you make when you sell an asset for more than you paid for it. Buy a stock for $10,000, sell it for $15,000, and the $5,000 difference is a capital gain. Until you sell, the gain is unrealized and no tax is due.

How much tax you owe depends most of all on how long you held the asset, though your income, the type of asset, and your state all play a part.

How Much Is Capital Gains Tax?

Assets held one year or less produce short-term capital gains, taxed as ordinary income at your regular marginal rate, which tops out at 37%.

Assets held more than one year produce long-term capital gains, taxed at 0%, 15%, or 20% depending on your taxable income. For 2026 a single filer pays nothing up to $49,450 of taxable income, 15% up to $545,500, and 20% above that. For a married couple filing jointly the same breakpoints are $98,900 and $613,700. The full rate table by filing status covers heads of household and separate filers.

Two things those rates leave out. High earners also owe the 3.8% net investment income tax (NIIT), charged on the lesser of your net investment income or the amount your modified adjusted gross income (MAGI) exceeds $200,000 single, $250,000 married filing jointly, or $125,000 filing separately. Where it applies in full it brings the effective top rate to 23.8%. And most states tax capital gains as ordinary income with no preferential rate at all, so your combined rate can be considerably higher than the federal figures suggest.

These thresholds apply to taxable income, meaning income after deductions. A married couple with $130,000 of gross income taking the 2026 standard deduction of $32,200 has about $97,800 of taxable income, which leaves only about $1,100 of room below the $98,900 ceiling. Realizing more than that pushes the excess into the 15% band. The room widens quickly as income falls, which is why gain harvesting is mostly a strategy for low-income years rather than a routine annual move.

The One-Year Line

The holding period starts the day after you acquire the asset. To be long-term, you have to sell after the one-year anniversary of that acquisition date. Selling on the anniversary itself is still short-term, and because leap years shift the day count, the anniversary date is the reliable test rather than counting days.

For someone in the 32% bracket with a $50,000 gain, crossing that date changes the federal tax from roughly $16,000 to $7,500.

Inherited, gifted, and reinvested shares each start their clock differently, and those cases are covered under long-term capital gains.

Capital Gains Tax on Real Estate

Selling your primary residence is the largest exception in the code. Under Section 121 you can exclude up to $250,000 of gain if you are single, or $500,000 if married filing jointly, as long as you owned and lived in the home for at least two of the five years before the sale. The $500,000 amount has extra conditions: either spouse can meet the ownership test, but both must meet the use test, and neither can have used the exclusion in the prior two years. The exclusion is generally available once every two years.

Gain above the exclusion is a regular long-term capital gain at the rates above. Depreciation claimed after May 1997, such as for a home office or a period of renting the property out, stays taxable even when Section 121 otherwise applies. Investment property works differently again: there is no Section 121 exclusion at all, and claimed depreciation is recaptured at rates up to 25%.

How to Reduce Capital Gains Tax

Several levers exist, each with its own conditions:

• Hold past one year. The simplest and usually the largest single reduction available.
• Harvest losses. Realized losses offset realized gains dollar for dollar, and up to $3,000 of net loss can offset ordinary income each year ($1,500 if married filing separately), with the remainder carried forward. See tax-loss harvesting.
• Realize gains in low-income years. If your taxable income sits inside the 0% bracket, selling appreciated assets can produce no federal tax on the gain, and repurchasing immediately resets your cost basis higher. The wash sale rule restricts repurchasing at a loss, not at a gain.
• Hold assets inside tax-advantaged accounts. Gains inside an IRA or 401(k) generate no capital gains tax; withdrawals are taxed as ordinary income instead.
• Donate appreciated assets. Giving stock directly to a charity or a donor-advised fund avoids the gain and may allow a deduction at fair market value, though that treatment generally requires property held more than a year and remains subject to limits based on your income and the type of charity.
• Leave assets to heirs. Under step-up in basis, inherited assets reset to fair market value at death and the embedded gain disappears.

Which of these is worth doing depends on your bracket, your time horizon, and what else lands in the same tax year. Harvesting gains and converting to Roth in particular draw on the same bracket space, so you can compare the two in ProjectionLab’s tax optimizer to see which sequence leaves more after tax.

None of them changes the underlying arithmetic: the tax is a function of the gain, your income, and how long you held. The levers only move when and at what rate you recognize it.

Frequently Asked Questions

Do I owe capital gains tax if I do not sell? No. Gains are taxed only when realized. A portfolio that has doubled on paper creates no federal tax liability until you sell, which is part of why long holding periods are tax-efficient on their own.

Do I owe capital gains tax if I reinvest the proceeds? Yes. Reinvesting does not defer anything. The sale is a taxable event regardless of what you do with the money afterward, with narrow exceptions such as a 1031 exchange for investment real estate.

How are capital gains on mutual funds and ETFs taxed? Two ways. You owe tax when you sell your own shares at a profit, and you may also owe tax on capital gain distributions the fund passes through, even in a year when you neither bought nor sold. Exchange-traded funds generally distribute less than actively managed mutual funds.

Can capital losses offset ordinary income? Up to $3,000 per year, or $1,500 if married filing separately. Losses first offset gains of the same type, then gains of the other type, and only what remains can offset ordinary income. Anything still left carries forward indefinitely.