The federal capital gains rate is not a single number. It depends on holding period, total taxable income, the type of asset, and whether the 3.8% Net Investment Income Tax applies. Understanding which bracket your gain falls into is the difference between paying 0% and paying 23.8% on the same dollar of gain.
What Are the Capital Gains Tax Rates for 2026?
For 2026, long-term capital gains (assets held more than one year) are taxed at three federal rates based on taxable income: 0% up to $48,350 single / $96,700 married filing jointly; 15% from there to $533,400 single / $600,050 married filing jointly; and 20% above those thresholds. Short-term capital gains (held one year or less) are taxed at the same ordinary rates as wages, up to 37%.
Two surcharges layer on top of the headline rate. The 3.8% Net Investment Income Tax applies to the lesser of net investment income or modified AGI above $200,000 single / $250,000 married filing jointly. The Additional Medicare Tax of 0.9% applies to wages and self-employment earnings (not capital gains) above the same thresholds. For high-income filers, the all-in long-term capital gains rate is therefore 23.8% federal.
State tax adds another layer that varies by jurisdiction. California taxes capital gains as ordinary income (top rate 13.3%). New York taxes capital gains as ordinary income (top rate 10.9% plus NYC if applicable). Texas, Florida, Washington (excluding the 7% capital gains tax on amounts over $250K), and other no-income-tax states tax gains at 0% at the state level, leaving only federal exposure.
What Is the Difference Between Short-Term and Long-Term Capital Gains?
Holding period is measured in days from the day after acquisition to the day of disposition. Held more than 365 days = long-term. Held 365 days or fewer = short-term. The distinction carries massive tax weight because long-term rates max out at 20% federal while short-term rates max out at 37% federal: a 17-percentage-point swing.
For taxpayers in the 32%, 35%, or 37% bracket, holding for one extra day past the one-year threshold can mean tens of thousands in tax savings on a single trade. The trade-off is market risk during the additional holding period. For positions with large embedded gain near year-one anniversary, the math almost always favors waiting unless there is a fundamental reason to exit immediately.
Inherited property gets a special rule: regardless of how long the decedent held it, it is automatically considered long-term in the heir's hands. Gifted property generally takes the donor's basis and holding period unless the FMV at gift was lower than basis, in which case a different "dual basis" rule applies for measuring loss.
What Is the 3.8% Net Investment Income Tax?
The NIIT under IRC Section 1411 imposes a 3.8% tax on the lesser of (a) net investment income or (b) modified AGI above $200,000 single / $250,000 MFJ / $125,000 MFS. The thresholds are NOT indexed for inflation, so over time more taxpayers cross into NIIT territory.
Net investment income includes interest, dividends, capital gains (both short and long-term), rental and royalty income, non-qualified annuities, and passive business income. Wages, self-employment income, active business income, IRA and 401(k) distributions, and Social Security are all excluded from NIIT.
For long-term capital gains, NIIT stacks on top of the 0/15/20% rate, producing effective rates of 0% (for taxpayers below threshold), 18.8% (for the 15% capital gains bracket plus NIIT), and 23.8% (for the 20% capital gains bracket plus NIIT). Real estate professionals who materially participate can exclude rental income and gain from NIIT. Active business owners can exclude their share of business gain from NIIT. See our NIIT glossary entry for the full breakdown.
How Are Capital Gains Taxed on Inherited Property?
Inherited property receives a "stepped-up basis" to fair market value at the date of death under IRC Section 1014. The heir's basis equals the FMV on the date of the decedent's death (or 6 months later if the alternate valuation date is elected on Form 706). Any appreciation that occurred during the decedent's lifetime is wiped out for income tax purposes.
This step-up is the single most powerful tax planning tool in estate planning. A taxpayer who held a stock with $1 million of unrealized gain has two options: sell during life and pay capital gains tax (potentially $238,000 federal at 23.8%), or hold until death and pass the stock to heirs at stepped-up basis with $0 income tax. For appreciated assets where the holder does not need to liquidate, holding to death is often the cleanest tax outcome.
Spousal property held jointly receives a 50% step-up at the first death (under most state laws) or 100% step-up in community property states (California, Texas, and others). Strategic asset titling matters: a community property regime in Texas or California gives the surviving spouse a full step-up on the entire asset.
How Can You Reduce Capital Gains Tax Legally?
The first lever is timing: holding past the one-year mark to capture long-term rates rather than short-term. Tax-loss harvesting (selling positions at a loss to offset realized gains) can offset capital gains dollar-for-dollar plus up to $3,000 of ordinary income per year, with excess losses carrying forward indefinitely. Watch the wash sale rule under IRC Section 1091, which disallows the loss if substantially identical securities are repurchased within 30 days.
Second, charitable strategy. Donating appreciated long-term securities directly to a public charity or a Donor-Advised Fund avoids capital gain entirely AND generates a fair-market-value deduction up to 30% of AGI. On a $50,000 long-term position with $10,000 basis, donating in-kind avoids $9,520 of federal long-term capital gains plus NIIT and produces a $50,000 deduction. Donating cash and selling separately costs the same gain.
Third, Qualified Small Business Stock under IRC Section 1202. C-Corp stock issued by a qualifying small business (gross assets under $50 million when issued, $75 million post-OBBBA), held more than 5 years, and sold by a non-corporate taxpayer can be excluded from gain up to the greater of $10 million ($15 million post-July 4, 2025) or 10x basis. QSBS is the reason many tech founders organize as C-Corps despite double taxation: the eventual liquidity event can be 8 or 9 figures of tax-free gain.
Fourth, Section 1031 like-kind exchanges defer gain on real estate sales by rolling proceeds into a replacement property within 45 days for identification and 180 days for closing. The deferred gain rolls into the basis of the new property, allowing tax-free deferral until ultimate sale (or step-up at death).
Fifth, Opportunity Zones under IRC Section 1400Z-2. Reinvesting eligible capital gains into a Qualified Opportunity Fund within 180 days defers the gain to 2026 (or earlier disposition) and excludes the post-investment appreciation entirely if held 10+ years.
Sixth, primary residence sale exclusion under Section 121. Up to $250,000 single / $500,000 married filing jointly of gain on the sale of a primary residence is excluded from federal income tax if the home was owned and used as primary residence for at least 2 of the last 5 years. See our home sale tax exclusion guide.
Have Questions About Capital Gains Tax Planning?
Capital gains planning sits at the intersection of investment timing, charitable structure, and estate planning. Getting it right can save tens or hundreds of thousands; getting it wrong costs the same. Contact TS CPA for a free consultation. We respond the same day.
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