Reviewed 12 August 2026 · Sourced from the Internal Revenue Code and the IRS
Capital gains tax is the tax on your profit when you sell an asset — the sale price minus your cost basis, not the whole amount that hits your account. Hold it more than one year and the federal rate is 0%, 15% or 20%; hold it one year or less and the gain is taxed at your ordinary income rate like a paycheck.
The part that costs people money: those 0/15/20 brackets are measured against your entire taxable income including the gain, not against the gain by itself. A single sale can be taxed partly at 0% and partly at 15%, and a big enough one drags you into a separate 3.8% surtax whose thresholds have never been adjusted for inflation.
- Long-term means held more than one year, not one year. 26 U.S.C. § 1222 says “more than 1 year” for long-term and “not more than 1 year” for short-term, so a holding period of exactly one year lands on the expensive side of the line.
- The 2026 breakpoints are taxable income figures, not gain figures. Per Rev. Proc. 2025-32, the 0% rate runs to $49,450 of taxable income for a single filer and $98,900 for a joint return — and the gain itself counts toward those totals.
- One gain can be taxed at two rates. The gain stacks on top of your ordinary income, so the slice that fits under the 0% ceiling is taxed at 0% and the rest at 15%. The worked example below pays a blended 12.2% on a $30,000 gain.
- Short-term gains get no break at all. They are taxed at your ordinary rate, which for most working people is higher than 15%, and they are the reason a fast trade can cost more in tax than a slow one on identical profit.
- The 3.8% net investment income tax has never been indexed. § 1411 fixes the thresholds at $200,000 single and $250,000 joint with no cost-of-living clause anywhere in the section, so inflation pulls more sellers over the line every year.
- Selling your home is treated differently. § 121 lets you exclude up to $250,000 of gain ($500,000 on a joint return) if you owned and lived in it two of the last five years — amounts set in 1997 and never adjusted since.
What capital gains tax actually taxes
You put $4,000 into an index fund and three years later the position is worth $6,500. You sell. All $6,500 lands in your bank account — but only $2,500 of it is taxable. That $2,500 is a capital gain.
A capital gain is what is left when you subtract what an asset cost you from what you got for it. The cost side has a name — your cost basis — and it is not always the number on the receipt. Commissions, improvements to a house and reinvested dividends all move it. Inherit an asset instead of buying it and the basis resets entirely under 26 U.S.C. § 1014, the step-up in basis.
Two pieces of law do almost all the work. 26 U.S.C. § 1222 sorts every gain into short-term or long-term. 26 U.S.C. § 1(h) sets the preferential rate on the long-term ones.
Nothing is taxed while you hold. A fund that tripled costs you no capital gains tax until you sell it — the sale is the trigger, not the growth. (Mutual funds can pass gains through along the way as capital gain distributions, taxed even though you sold nothing. That is the fund selling, not you.)
Capital gains tax is a tax on the profit from selling an asset — 0%, 15% or 20% federally if you held it more than a year, and your ordinary paycheck rate if you did not.
On Form 1099-B from your broker, on Form 1099-S when real estate sells, on Schedule D of your 1040, and on the settlement statement when an inherited house closes.
The one-year line, and why “one year” is the wrong way to say it
§ 1222 draws the line in four words, and they are worth reading slowly. A long-term capital gain is gain from an asset “held for more than 1 year.” A short-term capital gain is gain from an asset “held for not more than 1 year.”
It is not one year. It is more than one year. A holding period of exactly twelve months is short-term. That is why careful writers say “a year and a day” and careless ones say “a year.”
Short-term gains get no special rate at all. They are added to your ordinary income and taxed at whatever bracket it lands in, exactly like overtime pay. Long-term gains get the § 1(h) schedule instead.
| Same $10,000 profit | Rate applied | Federal tax on the gain |
|---|---|---|
| Sold at 11 months (short-term) | Ordinary rate, 22% in this example | $2,200 |
| Sold at 13 months (long-term) | 15% | $1,500 |
| Difference | — | $700 |
That table is our own arithmetic, not a published figure: it assumes a 22% ordinary bracket and a 15% long-term rate. The point is not the exact $700, it is that the statute puts a price on the calendar.
The day you count from is the day after you acquired the asset. That convention comes from IRS Publication 550, not the statute, and it is flagged in the ledger below because we did not read that publication directly. The statutory language, which we did read, says only “more than 1 year.”
The 2026 rates, and what the brackets are measured against
Here is the sentence that costs people the most money, so it gets its own paragraph. The 0%, 15% and 20% brackets are not brackets on your gain. They are brackets on your total taxable income, and the gain is part of that total.
Almost every consumer article blurs this. You will read “if your income is under $49,450 you pay 0% on capital gains,” which sounds like the gain is measured separately. It is not. Under § 1(h) the gain stacks on top of your ordinary taxable income, and the rate is decided by where the stack ends up.
The 2026 figures below come from Rev. Proc. 2025-32, section 3.03, the IRS revenue procedure setting the inflation-adjusted amounts for tax year 2026.
| Filing status (2026) | 0% while taxable income is up to | 15% up to | 20% above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married filing jointly / surviving spouse | $98,900 | $613,700 | $613,700 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
| Head of household | $66,200 | $579,600 | $579,600 |
| Estates and trusts | $3,300 | $16,250 | $16,250 |
Look at the last row. An estate or trust hits 20% at $16,250 of taxable income; a single person does not reach it until $545,500. That compression is why it matters whether an account went through probate or passed by beneficiary designation.
On 12 August 2026 the IRS consumer page Topic No. 409 still displayed the 2025 breakpoints ($48,350 single, $96,700 joint) — the IRS's own page carrying last year's numbers. The revenue procedure is the authority for 2026.
A gain that straddles two rates, worked all the way through
Two people sell the same fund on the same day for the same $30,000 long-term gain. One owes $3,667.50. The other owes nothing.
Person A, single filer, 2026. Wages $60,000. Long-term capital gain $30,000. Adjusted gross income $90,000. She takes the 2026 standard deduction of $16,100 (also from Rev. Proc. 2025-32), so her taxable income is $73,900.
Now split that taxable income. $30,000 of it is the gain, so her ordinary taxable income is $73,900 − $30,000 = $43,900, and the gain sits on top of it.
The 0% ceiling for a single filer in 2026 is $49,450 of taxable income. She has $49,450 − $43,900 = $5,550 of room underneath it:
$5,550 taxed at 0% = $0 · $24,450 taxed at 15% = $3,667.50Federal tax on the gain: $3,667.50. That is an effective rate of 12.2% on a $30,000 gain, which is not one of the three published rates. It is a blend, because the gain straddled the 0% and 15% bands. This is our arithmetic applied to the published 2026 breakpoints, not a figure from the IRS.
Now Person B. Same $30,000 gain, but wages of $20,000 instead of $60,000. AGI $50,000, minus the same $16,100 standard deduction, taxable income $33,900. Ordinary taxable income is $3,900, leaving $45,550 of room under the $49,450 ceiling — more than the whole gain. Every dollar of the $30,000 is taxed at 0%. Federal tax on the gain: nothing.
Same asset, same profit, same year. The wages moved it. The same stacking rule drives the retirement withdrawal guide.
A large gain also raises your adjusted gross income, and AGI is the input to things that have nothing to do with investing: marketplace health insurance subsidies, income-driven student loan payments, and the income-related surcharge on Medicare premiums. The tax on the gain is sometimes the smaller half of what a sale costs.
The rates that are not 0, 15 or 20
“Capital gains are taxed at 15%” survives because it is often true. There are four departures, and three raise the number.
28% on collectibles. IRS Topic No. 409 states that net capital gains from selling collectibles — its examples are coins and art — are taxed at a maximum 28% rate. That catches gold and silver coins and bullion funds.
25% on unrecaptured section 1250 gain. Same source: gain on section 1250 real property attributable to depreciation you already deducted is taxed at a maximum 25% rate. Write off depreciation on a rental year after year and it comes back at 25% when you sell. Landlords with one rental house are routinely blindsided.
3.8% net investment income tax, on top. § 1411 taxes 3.8 percent of the lesser of your net investment income or the amount your modified AGI exceeds a threshold. The IRS page lists those thresholds as $250,000 married filing jointly, $125,000 married filing separately, and $200,000 single or head of household, and confirms capital gains count as net investment income.
Single filer, modified AGI $250,000, of which a $90,000 capital gain is the reason. The excess over the $200,000 threshold is $50,000. The tax is 3.8% of the lesser of $90,000 and $50,000 — so 3.8% × $50,000 = $1,900, on top of whatever § 1(h) already charged. Our arithmetic, applied to the statutory formula.
Read § 1411 and notice what is not there: any cost-of-living adjustment. It fixes $200,000 and $250,000 as flat numbers with no indexing clause anywhere in the section. Every year of inflation quietly moves more sellers above them.
Your state. Treatment varies enormously — some states tax gains as ordinary income, some have no individual income tax at all, a few have separate schedules. We do not publish a fifty-state table we would have to re-verify annually. Check your state revenue department directly.
The house: the $250,000 exclusion, and what happens when someone dies
For most households the largest capital gain they will ever have is a house, and Congress carved it out. 26 U.S.C. § 121 excludes the gain from income entirely, up to a limit, if you owned and lived in the place as your principal residence for periods totaling two years or more during the five-year period ending on the sale date.
The limit is $250,000 under § 121(b)(1), or $500,000 on a joint return under § 121(b)(2)(A) where either spouse meets the ownership test and both meet the use test. § 121(b)(3) blocks it entirely if you already used the exclusion on another sale in the two years before this one.
A couple bought in 1998 for $120,000 and put $80,000 of documented improvements in, so their adjusted basis is $200,000. They sell in 2026 for $700,000 with $45,000 of selling costs: amount realized $655,000, gain $455,000. The joint exclusion is $500,000. Taxable gain: zero. They may still have to report it — IRS Topic No. 701 says a Form 1099-S means you report the sale even when the gain is excluded.
Now change one fact. One spouse has died and the survivor sells alone, three years later. Same house, same $455,000 gain — but the exclusion is $250,000, so $205,000 is exposed, and that much income can also push the survivor past the $200,000 single threshold for the 3.8% surtax. § 121(b)(4) is the narrow relief: an unmarried surviving spouse keeps the $500,000 figure if the sale happens not later than 2 years after the date of death and the joint-return requirements were met immediately before it. Two years, then it halves. Our death of a spouse guide covers the wider version of that clock.
Two more parts get skipped. Subsection (b)(5) allocates gain to “periods of nonqualified use” by the ratio of that period to total ownership, so a house that was a rental for six years and a home for three does not get the full exclusion. Subsection (d)(3)(B) treats you as using the home while a spouse or former spouse has use of it under a divorce or separation instrument — which matters in a divorce where one person moved out long before the sale.
The $250,000 and $500,000 figures were set by the Taxpayer Relief Act of 1997 and there is no inflation adjustment clause anywhere in § 121. Housing has not held still since 1997. The exclusion has.
Losses: the $3,000 wall, and the carryforward that never expires
Losses are the other half, and narrower than people assume. § 1211(b) allows capital losses “only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of — (1) $3,000 ($1,500 in the case of a married individual filing a separate return), or (2) the excess of such losses over such gains.”
Unpack that. Losses first cancel gains, dollar for dollar, without limit. Only the leftover runs into the $3,000 wall, and only that leftover reduces ordinary income like wages.
You have $9,000 of long-term gains and $16,000 of long-term losses. The losses wipe out the gains completely — no cap on that part — leaving $7,000 of net loss. Of that, $3,000 comes off your ordinary income this year; at a 22% bracket, worth $660 off the tax bill (our arithmetic). The remaining $4,000 carries forward.
§ 1212(b) handles the carryforward and does two things worth knowing. The loss keeps its character: a leftover long-term loss arrives next year as long-term. And the statute simply says the excess becomes a loss “in the succeeding taxable year” and stops — no expiration clause, no year cap for individuals. That silence is where “capital losses carry forward indefinitely” comes from; it is not a phrase the statute uses.
| Step | What happens | Limit |
|---|---|---|
| 1 | Short-term losses net against short-term gains; long-term against long-term | No limit |
| 2 | A leftover net loss in one category offsets a net gain in the other | No limit |
| 3 | Any remaining net loss reduces ordinary income | $3,000 ($1,500 if MFS) |
| 4 | What is left carries forward, keeping its character | No stated expiration |
One rule ruins this: selling at a loss and buying the same or a substantially identical security within thirty days on either side disallows the loss under the wash sale rule. The loss is not gone forever — it moves to the basis of the replacement — but it is not usable this year, which is the year you wanted it.
$3,000 is not indexed and has not moved in decades. A $30,000 net loss with no gains to absorb it takes ten years to deduct. That is the actual arithmetic of “you can write off your losses.”
What is confirmed, what is unverified, what is convention
Where a figure traces to a source, this table names it. Where it does not, it says so.
| Claim | Status | What establishes it, or doesn't |
|---|---|---|
| Long-term means held more than 1 year, not one year | Confirmed | § 1222(3) reads “more than 1 year”; § 1222(1) reads “not more than 1 year.” Statutory text read directly. |
| 2026: 0% to $49,450 taxable income single, $98,900 joint; 15% to $545,500 / $613,700 | Confirmed | Rev. Proc. 2025-32 § 3.03, the IRS revenue procedure for tax year 2026. Table read directly. |
| The brackets run on taxable income including the gain, so a gain can straddle two rates | Confirmed | The structure of § 1(h), which applies the rate to taxable income tiers, not the gain in isolation. The straddle dollar figures are our arithmetic on the published breakpoints. |
| 28% collectibles rate and 25% unrecaptured section 1250 rate | Confirmed | IRS Topic No. 409 states both as maximum rates. That page still showed 2025 figures on 12 August 2026. |
| 3.8% surtax at $200,000 / $250,000, never indexed | Confirmed | § 1411(a) sets the rate, § 1411(b) the thresholds. Read directly: no cost-of-living or inflation adjustment clause anywhere in the section. |
| § 121 excludes $250,000 / $500,000, set in 1997, never indexed | Confirmed | § 121(b)(1) and (b)(2)(A) read directly; no adjustment clause in the section. The 1997 origin comes from the amendment notes citing Pub. L. 105-34 — that public law text was not read here. |
| The $3,000 loss limit has been fixed since 1978 | Unverified | Widely repeated. The current $3,000 in § 1211(b) is confirmed, but the amendment notes we read run through 1986 and never state when it was set. We could not trace 1978 to a primary source and do not assert it. |
| Your holding period starts the day after you acquire the asset | Unverified | This day-count convention appears in IRS Publication 550, not read directly for this page. The statute says only “more than 1 year.” |
| Capital losses carry forward indefinitely | Convention, reasoned | § 1212(b) moves the excess to “the succeeding taxable year” with no expiration stated for individuals. “Indefinitely” follows from the silence; it is not a word the statute uses. |
What trips people up
Five errors that actually cost money.
1. Treating the bracket as if it applied to the gain alone. Someone reads “0% up to $49,450,” has a $40,000 gain, and concludes they owe nothing — forgetting the $45,000 salary in the same stack. Almost the entire gain is taxed at 15% instead, roughly $6,000 unplanned. This is the most common misreading of the whole subject.
2. Not knowing the basis, and defaulting to zero. If you cannot document what an asset cost, the fallback is a basis of zero and tax on the entire sale price. On an inherited house that is catastrophic: get a date-of-death appraisal under § 1014 rather than reconstructing one years later. A $310,000 house with a documented step-up produces almost no gain; undocumented, it can produce a six-figure one. See cost basis.
3. Selling at eleven and a half months. The line is more than one year, and it is worth real money — $700 on a $10,000 gain in the example above. People sell on the anniversary date thinking they cleared it. Exactly one year is short-term.
4. Harvesting a loss and buying back too soon. The wash sale rule disallows the loss if you repurchase a substantially identical security inside a sixty-one-day window around the sale. The deduction you sold specifically to capture does not appear on your return.
5. Forgetting the second bill. The 3.8% surtax, 25% depreciation recapture on a former rental, state tax, and the AGI-driven hits to health subsidies and Medicare premiums all sit outside the headline 15%. On a large sale they routinely exceed the 15%-versus-20% difference people worry about.
This page describes how the rules work and what they cost. It is not tax advice for your situation, and a sale involving inherited property, a former rental or a business interest is exactly where an hour with a CPA is cheaper than the mistake.
Frequently asked questions
What is capital gains tax?
Capital gains tax is the federal tax on the profit you make when you sell an asset for more than it cost you. The taxable amount is the sale price minus your cost basis, not the full sale amount. If you held the asset more than one year, the gain is long-term and taxed at 0%, 15% or 20% under 26 U.S.C. § 1(h). If you held it one year or less, it is short-term and taxed at your ordinary income rate, the same as wages. Nothing is taxed while you hold — the sale is the trigger.
How long do I have to hold something to get the long-term rate?
More than one year. 26 U.S.C. § 1222 defines a long-term gain as one on an asset “held for more than 1 year” and a short-term gain as one “held for not more than 1 year.” A holding period of exactly one year is therefore short-term, which is why careful writers say “a year and a day.” The convention is to start counting the day after you acquired the asset, though that day-count rule comes from IRS guidance rather than the statute itself.
What are the 2026 capital gains tax brackets?
For tax year 2026, per IRS Rev. Proc. 2025-32, the 0% rate applies while taxable income is at or below $49,450 single, $98,900 married filing jointly, $66,200 head of household, and $49,450 married filing separately. The 15% rate runs to $545,500, $613,700, $579,600 and $306,850 respectively; above those, 20%. Estates and trusts are compressed dramatically, hitting 20% at $16,250. The critical detail is that these are total taxable income figures and your gain counts toward them, so one gain can be taxed partly at 0% and partly at 15%.
Do I pay capital gains tax when I sell my house?
Often not. 26 U.S.C. § 121 lets you exclude up to $250,000 of gain, or $500,000 on a joint return, if you owned and used the home as your principal residence for periods totaling two years or more out of the five years ending on the sale date. You cannot use it if you already excluded gain on another sale in the prior two years. Gain above the exclusion is taxed as a normal long-term capital gain. IRS Topic No. 701 notes that a Form 1099-S means you report the sale even when the whole gain is excluded.
How much of a capital loss can I deduct in one year?
Losses offset gains with no limit at all. Only the leftover net loss runs into a cap, and 26 U.S.C. § 1211(b) sets that at $3,000 per year against ordinary income, or $1,500 if married filing separately. Anything beyond that carries forward under § 1212(b), keeping its short-term or long-term character, with no expiration stated for individuals. So a $30,000 net loss with no gains to absorb it takes ten years to deduct. Watch the wash sale rule, which can disallow a loss you sold specifically to claim.
What is the 3.8% net investment income tax and does it apply to me?
It is a separate surtax under 26 U.S.C. § 1411 that sits on top of the regular capital gains rate. It equals 3.8 percent of the lesser of your net investment income or the amount your modified adjusted gross income exceeds a threshold. The IRS lists those thresholds as $250,000 married filing jointly, $125,000 married filing separately, and $200,000 single or head of household, and capital gains count as net investment income. Worth knowing: § 1411 contains no inflation adjustment clause, so inflation pulls more people over the line every year.
Do I owe state capital gains tax too?
Possibly, and it depends entirely on where you live. Some states tax capital gains as ordinary income at their regular rates, some have no individual income tax at all, and a few have separate schedules for investment income. No federal source settles this, and we deliberately publish no fifty-state table, because a stale one is worse than none. Check your own state's revenue department directly. The federal rules on this page apply the same way regardless of state.
Related terms
Where to go next
- Cost basis — the other half of every gain calculation, and the number most people cannot document when it counts.
- Step-up in basis — how § 1014 resets an inherited asset's basis to date-of-death value, and why a lifetime gift does the opposite.
- Step-up in basis calculator — put your own basis and value in and see what the same asset costs sold today versus left to an heir.
- The wash sale rule — the one rule that turns a harvested loss into no deduction at all.
- Stage 4: Invest — the course stage where taxable brokerage accounts, tax-advantaged accounts and holding periods fit together.
- Legal Information Institute, Cornell Law School — 26 U.S.C. § 1222, Other terms relating to capital gains and losses — establishes the “more than 1 year” long-term test and the “not more than 1 year” short-term test quoted on this page.
- Legal Information Institute, Cornell Law School — 26 U.S.C. § 1(h), Maximum capital gains rate — establishes that the preferential rate is applied to tiers of taxable income, which is why a gain can straddle two rates.
- Internal Revenue Service — Rev. Proc. 2025-32, inflation adjustments for tax year 2026 (PDF) — establishes every 2026 figure on this page: the 0% and 15% breakpoints by filing status, the estate and trust breakpoints, and the $16,100 / $32,200 standard deductions.
- Internal Revenue Service — Topic No. 409, Capital gains and losses — establishes the 28% maximum collectibles rate, the 25% maximum unrecaptured section 1250 rate, and the $3,000 / $1,500 loss deduction. Displayed 2025 bracket figures when checked on 12 August 2026.
- Legal Information Institute, Cornell Law School — 26 U.S.C. § 1411, Imposition of tax — establishes the 3.8 percent rate, the $250,000 / $200,000 threshold amounts, and the absence of any inflation adjustment clause.
- Internal Revenue Service — Net Investment Income Tax — establishes the thresholds by filing status and that capital gains are included in net investment income.
- Legal Information Institute, Cornell Law School — 26 U.S.C. § 121, Exclusion of gain from sale of principal residence — establishes the two-of-five-year test, the $250,000 and $500,000 limits, the two-year lookout rule, the surviving spouse rule in (b)(4), the nonqualified use allocation in (b)(5), and the divorce use rule in (d)(3)(B).
- Internal Revenue Service — Topic No. 701, Sale of your home — establishes the 24-month ownership and use framing and the Form 1099-S reporting requirement even when gain is excluded.
- Legal Information Institute, Cornell Law School — 26 U.S.C. § 1211, Limitation on capital losses — establishes the quoted $3,000 / $1,500 language and that losses offset gains without limit before the cap applies.
- Legal Information Institute, Cornell Law School — 26 U.S.C. § 1212, Capital loss carrybacks and carryovers — establishes that a carried-forward loss retains its short-term or long-term character and that no expiration is stated for individuals.
- Legal Information Institute, Cornell Law School — 26 U.S.C. § 1014, Basis of property acquired from a decedent — establishes the date-of-death basis reset referenced in the inherited-house examples.
- Internal Revenue Service — About Publication 523, Selling Your Home — the IRS worksheets for computing adjusted basis and excluded gain on a residence; listed as the place to work the home numbers, not quoted here.
- Internal Revenue Service — About Schedule D (Form 1040) — the form on which the netting order and the carryforward described on this page are actually performed.
The figures on this page are checked against the source that publishes them, and dated. Published rates move after the release named above — the linked source always carries the current number. This page explains a term; it does not recommend a product.