What is Capital Gains Tax?

Capital gains tax is the US federal tax on the profit when you sell a capital asset for more than your basis. Short-term gains (held one year or less) are taxed at ordinary income rates up to 37 percent. Long-term gains (held more than one year) are taxed at preferential rates of 0, 15, or 20 percent depending on taxable income, with a 3.8 percent Net Investment Income Tax stacked on top for high earners.

Detailed definition

Capital gains tax is the federal levy on the profit realized when you sell a capital asset for more than your basis. The IRS defines a capital asset broadly: stocks, bonds, mutual funds, ETFs, real estate other than business inventory, business interests, crypto, art, coins, collectibles, and personal-use property. Basis is generally what you paid plus commissions, improvements, and reinvested dividends, less any prior depreciation. The gain is sale price minus basis minus selling costs.

Holding period decides the rate. Held one year or less, the gain is short-term and taxed at your ordinary marginal bracket, which tops out at 37 percent for 2026 above $626,350 single. Held more than one year, the gain is long-term and taxed at 0, 15, or 20 percent depending on taxable income (including the gain itself). A single filer with $48,350 or less in 2026 taxable income pays 0 percent on long-term gains; above $533,400 the rate jumps to 20 percent.

Two surcharges sit on top. The 3.8 percent Net Investment Income Tax applies to investment income once modified AGI exceeds $200,000 single or $250,000 MFJ, so the effective top long-term rate is 23.8 percent. Collectibles use a 28 percent maximum rate, and depreciation recapture on real estate is taxed at up to 25 percent. State capital gains tax stacks on federal in most states; nine states (Florida, Texas, Washington, Nevada, Tennessee, South Dakota, Wyoming, Alaska, New Hampshire on wages) currently have no broad state income tax.

Formula

Capital gain          = Sale price - Basis - Selling costs
Tax (long-term)       = Gain x bracket rate (0% / 15% / 20%)
NIIT (if applicable)  = 3.8% x lesser of (net investment income, MAGI above threshold)
Effective top rate    = 20% + 3.8% NIIT + state rate

Sale price = gross proceeds from the disposition (broker 1099-B box 1d).
Basis = original cost plus commissions, plus reinvested dividends, plus improvements, minus depreciation. Tracked on broker statements or Form 8949.
Bracket rate = look up your taxable income (including the gain) against the 2026 long-term brackets to determine 0, 15, or 20 percent.
NIIT threshold = $200,000 MAGI single, $250,000 MFJ, $125,000 MFS, $200,000 head of household.

Worked example

A single filer bought 200 shares of an S&P 500 ETF in March 2023 at $400 (basis $80,000) and sold them in November 2026 at $550 (proceeds $110,000). Her wage income for 2026 is $150,000.

Holding period: March 2023 to November 2026 is more than one year, so the gain is long-term.
Realized gain: $110,000 proceeds minus $80,000 basis equals $30,000.
Taxable income before the gain: $150,000 wages minus the $15,000 standard deduction equals $135,000.
Taxable income with the gain: $135,000 + $30,000 = $165,000, which falls inside the 15 percent long-term bracket (well below the $533,400 ceiling).
Federal long-term tax on the gain: $30,000 x 15 percent = $4,500.
NIIT check: MAGI of $180,000 is below the $200,000 single threshold, so no NIIT applies.

Result: She owes $4,500 in federal long-term capital gains tax. Had she sold in February 2024 (less than one year), the same $30,000 would have stacked onto wages at a 24 percent marginal bracket, costing roughly $7,200, a $2,700 penalty for selling too early.

Short-term vs long-term capital gains compared

The single biggest lever a taxable investor controls is holding period. The 2026 brackets below make the gap explicit.

Feature	Short-term	Long-term
Holding period	1 year or less	More than 1 year
Tax rate	10 to 37% (ordinary)	0 / 15 / 20%
2026 top single threshold	37% above $626,350	20% above $533,400
2026 zero bracket (single)	none	Up to $48,350 taxable income
NIIT surcharge eligibility	Yes, 3.8% above thresholds	Yes, 3.8% above thresholds
State treatment (most states)	Taxed as ordinary income	Usually taxed as ordinary income (CA, NY, NJ make no federal-style break)
Form reported	Schedule D + Form 8949 Part I	Schedule D + Form 8949 Part II

Related calculators on 3Tej

Plug in your own sale, basis, and bracket to size the federal tax bill in seconds:

Capital Gains Tax Calculator Marginal Tax Rate Calculator Effective Tax Rate Calculator US Salary Tax Calculator

Frequently asked questions

What are the 2026 long-term capital gains tax brackets?

For tax year 2026 the IRS sets long-term capital gains brackets at 0 percent on taxable income up to $48,350 single or $96,700 married filing jointly, 15 percent up to $533,400 single or $600,050 MFJ, and 20 percent above those thresholds. Head of household uses $64,750 and $566,700. The 3.8 percent Net Investment Income Tax may apply on top once MAGI exceeds $200,000 single or $250,000 MFJ.

How long must I hold an asset to qualify for long-term treatment?

More than one year, which the IRS reads as one year plus one day from the day after acquisition. Selling on the one-year anniversary still counts as short-term and is taxed at ordinary income rates. The clock starts the day after purchase, not the trade date itself, per IRS Publication 550.

How do capital losses reduce my tax?

Capital losses first offset capital gains of the same character: short-term against short-term, long-term against long-term. Any remaining net loss then crosses categories. Up to $3,000 of net capital loss can be deducted against ordinary income per year ($1,500 if married filing separately); anything beyond that carries forward indefinitely to future tax years.

Do I pay capital gains tax when I sell my primary home?

Under IRC Section 121 you can exclude up to $250,000 of gain ($500,000 married filing jointly) on the sale of a primary residence if you owned and used the home as your main home for at least two of the five years before the sale. Gain above the exclusion is taxed at long-term rates if you owned the home more than one year.

Are cryptocurrency gains taxed the same way as stocks?

Yes. The IRS treats cryptocurrency as property, not currency, so every taxable disposition (selling for cash, swapping one coin for another, spending crypto on goods) triggers a capital gain or loss equal to fair market value minus basis. Coins held more than one year qualify for the 0, 15, or 20 percent long-term brackets just like stocks.

What is the 3.8 percent Net Investment Income Tax?

The Net Investment Income Tax (NIIT) is an extra 3.8 percent surcharge on the lesser of net investment income or MAGI above $200,000 single or $250,000 married filing jointly. It stacks on top of the regular long-term rate, so a 20 percent bracket effectively becomes 23.8 percent for a high-income investor selling appreciated stock.

Sources and further reading

IRS (2025) Topic No. 409, Capital Gains and Losses, the canonical IRS page covering rates, holding period, and reporting.
IRS Rev. Proc. 2025-32 (October 2025), the official 2026 inflation adjustments for long-term capital gains brackets and ordinary income thresholds.
IRS (2024) Publication 550, Investment Income and Expenses, the full statutory treatment of basis, holding period, and wash-sale rules.
IRS (2024) Publication 523, Selling Your Home, Section 121 exclusion mechanics for a primary residence sale.
IRS (2024) Virtual Currency Transactions FAQ, treatment of crypto as property for capital gains purposes.

Last updated 2026-05-28.