What Is the Difference Between Short-Term and Long-Term Capital Gains?
Short-term capital gains apply to assets sold within one year of purchase and are taxed at your ordinary income rate, which can reach 37%. Long-term gains apply to assets held more than one year and face rates of 0%, 15%, or 20%. Holding an investment just over 12 months can dramatically reduce your tax bill.
How Are Capital Gains Rates Determined by Income?
For 2026, the 0% long-term rate applies to single filers with taxable income up to roughly $47,000. The 15% rate applies up to about $518,000, and the 20% rate applies above that. High earners may also owe a 3.8% Net Investment Income Tax on top of the standard capital gains rate.
What Strategies Can Reduce Capital Gains Tax?
Tax-loss harvesting offsets gains by selling losing positions. Holding assets beyond one year qualifies for lower long-term rates. Donating appreciated assets to charity avoids gains entirely. Using tax-advantaged accounts like IRAs shelters gains from current taxation. Timing sales to fall in low-income years can also reduce the rate applied.
Frequently asked questions
Is the gain on my home sale subject to capital gains tax?
Usually not fully. Single filers can exclude up to $250,000 of gain on a primary residence; married couples can exclude up to $500,000. You must have owned and lived in the home for at least two of the past five years to qualify for the exclusion.
What is the cost basis and why does it matter?
Cost basis is what you originally paid for an asset, including commissions and fees. Your taxable gain equals the sale price minus cost basis. A higher basis means a smaller gain and lower tax. Inherited assets receive a stepped-up basis equal to their fair market value at the date of death.