How Capital Gains Tax Works: Short-Term vs Long-Term Rates Explained

What Is Capital Gains Tax?

Capital gains tax is the tax levied on the profit from selling a capital asset (stocks, bonds, real estate, mutual funds, ETFs, cryptocurrency, and other investments) for more than you paid for it.

$Capital Gain = Sale Price - Cost Basis$

Your cost basis is what you originally paid for the asset, including any purchase commissions or fees. If you bought 100 shares at $40 ($4,000 total) and sold them at $65 ($6,500), your capital gain is $2,500.

Capital loss occurs when you sell for less than your cost basis. Capital losses can offset capital gains, a strategy called tax-loss harvesting, reducing your overall tax liability.

The critical distinction in capital gains taxation is holding period:

* Short-term capital gain: Asset held for 12 months or less, taxed at ordinary income tax rates (10-37%)

* Long-term capital gain: Asset held for more than 12 months, taxed at preferential rates (0%, 15%, or 20%)

This one-year threshold is the most important date in investment tax planning.

Short-Term Capital Gains Tax Rates 2026

Short-term gains are taxed as ordinary income: they're added to your taxable income and taxed at the same marginal rates as your salary.

Single Filers: Short-Term Capital Gains (= Ordinary Income Rates)

Taxable Income

Tax Rate

$0 - $11,925

10%

$11,926 - $48,475

12%

$48,476 - $103,350

22%

$103,351 - $197,300

24%

$197,301 - $250,525

32%

$250,526 - $626,350

35%

Over $626,350

37%

A short-term gain of $20,000 for a single filer earning $80,000 in ordinary income pushes total income to $100,000, with the gain taxed primarily at 22%, resulting in approximately $4,400 in federal tax on that gain alone.

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Long-Term Capital Gains Tax Rates 2026

Long-term capital gains on assets held more than 12 months are taxed at significantly lower preferential rates. These rates apply to net long-term capital gains: they do not stack on top of ordinary income; instead, they are layered on top of ordinary income but taxed at their own rate.

Long-Term Capital Gains Rates: 2026

Filing Status

0% Rate Up To

15% Rate Up To

20% Rate Above

Single

$48,350

$533,400

Over $533,400

Married Filing Jointly

$96,700

$600,050

Over $600,050

Head of Household

$64,750

$566,700

Over $566,700

Married Filing Separately

$48,350

$300,000

Over $300,000

The 0% rate: A single filer with taxable income (including long-term gains) below $48,350 pays zero federal capital gains tax on long-term gains. This is one of the most powerful and underused tax planning tools available.

The 15% rate: Applies to most middle and upper-middle income investors. A single filer earning $90,000 in salary and realising a $30,000 long-term gain pays 15% ($4,500) on the gain, versus 22-24% ($6,600-$7,200) if the same gain were short-term.

The 20% rate: Applies only to very high earners: single filers with income exceeding $533,400.

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Net Investment Income Tax (NIIT): The Additional 3.8%

High-income investors face an additional layer: the Net Investment Income Tax (NIIT), introduced under the Affordable Care Act. This 3.8% surtax applies to the lesser of:

* Net investment income (capital gains, dividends, interest, rental income), or

* The amount by which modified AGI exceeds the threshold

NIIT Thresholds (not inflation-adjusted):

* Single: $200,000

* Married Filing Jointly: $250,000

Effective top rates including NIIT:

* Long-term: 20% + 3.8% = 23.8%

* Short-term (at 37% bracket): 37% + 3.8% = 40.8%

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How to Calculate Your Capital Gains Tax: Step by Step

Step 1: Determine your cost basis

Cost basis = purchase price + acquisition costs (commissions, fees). For stocks acquired in multiple lots at different prices, you can choose which lots to sell: a strategy for minimising gains.

Step 2: Calculate the capital gain or loss

Capital Gain = Sale Price − Cost Basis

Step 3: Determine holding period

Count from the day after purchase to the date of sale. One year and one day = long-term. Exactly one year or less = short-term.

Step 4: Identify your applicable rate

Combine your ordinary income (salary, business income) with your capital gain to determine which bracket applies.

Step 5: Apply netting rules

Before calculating tax, net your gains and losses:

* Long-term gains offset long-term losses first

* Short-term gains offset short-term losses first

* Net short-term losses can offset net long-term gains

* Net capital losses offset ordinary income up to $3,000/year ($1,500 married filing separately)

* Excess losses carry forward to future tax years indefinitely

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

Scenario: Single filer, $75,000 in ordinary taxable income. Sells stock with a $25,000 gain.

If held less than 12 months (short-term):

* $25,000 gain taxed as ordinary income

* Income rises from $75,000 to $100,000

* Gain falls in 22% bracket

* Tax on gain: $25,000 × 22% = $5,500

If held more than 12 months (long-term):

* Total income including gain: $100,000

* Long-term gain taxed at 15% (below $533,400 threshold)

* Tax on gain: $25,000 × 15% = $3,750

Tax saved by holding one additional day past the 12-month mark: $1,750

On a $100,000 gain: short-term tax = $22,000 (at 22%). Long-term tax = $15,000. Savings: $7,000, for waiting one extra day past the 12-month mark.

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Capital Gains Tax Rates: Short-Term vs Long-Term Comparison

Ordinary Income

Short-Term Rate

Long-Term Rate

Annual Saving per $10,000 Gain

$40,000

12%

0%

$1,200

$75,000

22%

15%

$700

$110,000

24%

15%

$900

$200,000

32%

15%

$1,700

$260,000

35%

15%

$2,000

$650,000

37%

20% (+3.8%)

$1,320

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Tax-Loss Harvesting: Turning Losses Into Tax Savings

Tax-loss harvesting is the deliberate sale of investments at a loss to offset capital gains elsewhere in your portfolio, reducing your overall tax liability.

Example: You have $15,000 in long-term capital gains from selling appreciated stocks. You also hold a fund that's dropped $8,000 from your purchase price.

By selling the losing fund, you realise the $8,000 loss. This offsets $8,000 of your $15,000 gain, leaving only $7,000 subject to long-term capital gains tax.

Tax saved at 15% rate: $8,000 × 15% = $1,200

The wash-sale rule: The IRS prohibits repurchasing the same or a "substantially identical" security within 30 days before or after the sale (the wash-sale window). If you violate this rule, the loss is disallowed. You can immediately buy a similar but not identical fund (sell a Vanguard S&P 500 ETF and immediately buy an iShares S&P 500 ETF) maintaining market exposure without triggering the wash-sale rule.

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8 Legal Strategies to Reduce Capital Gains Tax

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Common Mistakes to Avoid

Selling appreciated assets without checking the holding period Many investors sell positions without checking whether they've crossed the 12-month threshold. Brokerage platforms display holding periods: always check before selling an appreciated position. Waiting days or weeks past the 12-month mark can save thousands.

Ignoring the wash-sale rule when harvesting losses Selling a losing position and immediately repurchasing the same fund triggers the wash-sale rule: the loss is disallowed and added back to your basis in the repurchased shares. Use a similar but not identical replacement fund for the 30-day window.

Realising large gains in a high-income year If you can defer a sale to a year with lower income (after a career change, during early retirement, or through other income timing strategies) you may qualify for the 0% or 15% rate rather than 20%. Year-end planning with a tax professional on large gains is almost always worthwhile.

Forgetting about state capital gains tax Federal rates are only part of the picture. Most US states tax capital gains as ordinary income, with rates ranging from 0% (no state income tax: Texas, Florida, Nevada, Washington) to 13.3% (California). California's combined federal and state top rate on short-term gains can exceed 50%. State tax must always be included in total gain calculations.

Ignoring adjusted cost basis for reinvested dividends Many investors forget that reinvested dividends increase their cost basis. If you reinvested $3,000 in dividends over the years in a fund you're now selling, your cost basis is $3,000 higher than the original purchase price, reducing your taxable gain by $3,000. Always use the adjusted cost basis from your brokerage, not the original purchase price alone.

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