What Is Capital Gains Tax?
In plain English
Capital gains tax is levied on the profit you earn when you sell a capital asset for more than you paid. Short-term gains on assets held one year or less are taxed as ordinary income. Long-term gains on assets held longer than one year qualify for preferential rates of 0%, 15%, or 20% depending on your income.
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.
Keep exploring
Related terms
Tax-Loss Harvesting
Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains and reduce your tax bill. It is a key strategy in taxable investment accounts.
Tax Bracket
Tax brackets are the income ranges at which different marginal rates apply under the U.S. progressive tax system. Only income within each bracket is taxed at that bracket's rate.
Tax Deduction
A tax deduction reduces your taxable income, lowering the amount of income subject to tax. The actual tax savings depend on your marginal tax bracket.
Estate Tax
The federal estate tax applies to the transfer of wealth from a deceased person's estate to heirs when the estate's value exceeds a high exemption threshold. Most estates owe no federal estate tax.
Tax-Exempt
Tax-exempt refers to income, organizations, or investments that are not subject to taxation. Common examples include municipal bond interest, Roth IRA withdrawals, and nonprofit organizations.