Capital Gains Tax Explained: Rates, Rules, and How to Minimize It

Bottom line: Sell an investment you held less than one year and pay your ordinary income tax rate. Hold it more than one year and pay 0%, 15%, or 20%, significantly lower for most investors. The single most accessible tax strategy is simply holding investments long enough to qualify for long-term rates.

Capital gains are profits from selling a capital asset (stocks, bonds, real estate, cryptocurrency, collectibles) for more than you paid (your "basis"). The tax owed depends on two things: how long you held the asset and your total taxable income.

Short-Term vs. Long-Term Capital Gains

Short-term: Held 12 months or less. Taxed as ordinary income, the same rates as your salary (10%–37%).

Long-term: Held more than 12 months. Taxed at preferential rates.

2026 long-term capital gains rates (approximate):

For most investors, those with total taxable income under $518,900 (single), long-term gains are taxed at 15%. For lower-income investors, the 0% rate means no federal tax on qualifying investment profits.

What Counts as Your Basis

Your basis is what you paid for the investment, including commissions and fees. When you sell, the gain is the selling price minus your basis.

Example: You bought 100 shares at $40 each ($4,000 total) and sell for $65 each ($6,500). Your gain is $2,500. If held more than a year, that $2,500 is a long-term capital gain.

For inherited assets, the basis is "stepped up" to the market value at the date of death, meaning inherited stock with a large unrealized gain may be sold immediately with no capital gains tax at all.

For gifted assets, the recipient generally takes the donor's original basis.

The Net Investment Income Tax (NIIT)

Higher earners pay an additional 3.8% Medicare surtax on net investment income (including capital gains) when modified AGI exceeds $200,000 (single) or $250,000 (married). This pushes the effective top rate on long-term gains to 23.8%.

Legal Strategies to Reduce Capital Gains Tax

Hold assets longer than one year. The most straightforward strategy. A 22% short-term rate dropping to 15% long-term on a $50,000 gain is $3,500 in savings.

Tax-loss harvesting. Sell investments at a loss to offset gains, a strategy covered in more depth in our tax-loss harvesting guide. Net losses can reduce your capital gains dollar-for-dollar; up to $3,000 in excess losses can offset ordinary income annually. Losses beyond $3,000 carry forward to future years.

Use tax-advantaged accounts for high-growth assets. Investments that generate significant gains belong in Roth IRAs or 401(k)s where gains are sheltered from annual taxation.

Time sales across tax years. If you have a large gain to realize, consider splitting the sale across two tax years to keep income below rate thresholds.

0% bracket harvesting. If your income is low enough to qualify for the 0% long-term rate (under ~$47,025 single in 2026), you can sell appreciated assets, realize gains tax-free, and buy them back immediately, resetting your basis higher with no tax cost. This strategy, called "gain harvesting," is the opposite of tax-loss harvesting and works when your income is temporarily low.

Primary residence exclusion. Gain from selling your primary home is excluded from tax up to $250,000 (single) or $500,000 (married), provided you lived in it for at least 2 of the last 5 years.

Capital gains rates and income thresholds adjust annually. Verify current rates at IRS.gov before making investment decisions based on tax considerations.