What Is Capital Gains Tax? (The 60-Second Version)

Capital gains tax is a tax on the profit you make when you sell an asset — stocks, a home, crypto, gold, or a business — not on the full sale amount. The profit is the difference between what you sold it for and your cost basis (generally what you paid, plus certain improvements or fees).

The key distinction is realized versus unrealized gains. While you simply hold an asset and it rises in value, the gain is “unrealized” and you owe nothing — no matter how much it has grown. The tax only triggers when you sell and “realize” the gain. So if your portfolio doubled this year but you didn’t sell, there’s no capital gains tax to pay.

For example: you buy a stock for $4,000 and later sell it for $10,000. Your cost basis is $4,000, your capital gain is $6,000, and only that $6,000 profit is taxed — not the $10,000 you received. How much you pay on that $6,000 depends entirely on one thing first: how long you owned it. New to this? Our beginner’s guide to investing in stocks in 2026 covers the basics of building a portfolio.

Short-Term vs. Long-Term Capital Gains

The single most important factor in your tax bill is the holding period, and the dividing line is exactly one year:

• Short-term gain: You held the asset for one year or less. It’s taxed at your ordinary income tax rate — the same 10%–37% brackets that apply to your paycheck.
• Long-term gain: You held the asset for more than one year (366+ days). It gets the preferential 0% / 15% / 20% rates.

That one-day difference can be worth thousands of dollars. Selling on day 365 versus day 366 can be the difference between paying your top income-tax rate and paying the much lower long-term rate.

In plain numbers: a $10,000 gain taxed at the 22% short-term rate costs $2,200, while the same gain held long enough to qualify as long-term and taxed at 15% costs just $1,500 — a $700 saving on one modest trade. Scale that up to a large position and waiting past the one-year mark can save tens of thousands.

2026 Ordinary Income Tax Brackets (For Short-Term Gains)

Because short-term gains are taxed at your ordinary income rate, you need to know which bracket you’re in. Here are the official 2026 ordinary income brackets from IRS Revenue Procedure 2025-32:

A short-term gain simply piles on top of your other income and gets taxed at whatever bracket it lands in. A W-2 worker earning $80,000 who flips a stock for a $10,000 short-term gain owes 22% on most of it — $2,200. The same gain held past the one-year mark? $1,500 at the long-term 15% rate.

2026 Capital Gains Tax Rates (Full Brackets)

Here are the official long-term capital gains tax rates for 2026, which apply to assets held more than one year. The rate you pay depends on your taxable income and your filing status. These figures come from IRS Revenue Procedure 2025-32, the IRS’s annual inflation adjustment.

So, is capital gains tax 15% or 20%? For the large majority of Americans, it’s 15%. The 0% rate is reserved for lower taxable incomes, and the 20% rate only applies to high earners — single filers above $545,500 and joint filers above $613,700 in taxable income.

2025 vs. 2026: What Changed

The brackets themselves (0%, 15%, 20%) didn’t change for 2026 — but the income thresholds rose for inflation, which is good news. A higher 0% ceiling means more of your gains can qualify for tax-free treatment. The table below shows the shift for single filers.

One critical point that catches people out: these 0/15/20 rates apply only to long-term gains. Short-term gains are taxed as ordinary income at 10%–37% — they do not get these preferential rates at all.

You may have heard that the 2025 tax law changed all this. It didn’t. The OBBBA (“One Big Beautiful Bill,” signed July 4, 2025) did not change capital gains tax rates. It made the TCJA ordinary-income brackets permanent and adjusted income thresholds for inflation — but the 0/15/20 capital gains structure is unchanged. We break down what the law actually did in our guide to OBBBA tax changes for 2026.

How Capital Gains Tax Is Calculated (With Real Examples)

Calculating the tax comes down to three steps:

1. Find the gain: Sale price − cost basis = your capital gain.
2. Determine the holding period: Held one year or less = short-term (ordinary rates). Held more than a year = long-term (0/15/20).
3. Stack the gain on your income: Long-term gains sit “on top of” your ordinary income to determine which bracket they fall into. Your wages fill the lower brackets first; the gain is then taxed at the rate for the income level it lands in.

Because readers usually search by dollar amount, here’s exactly how it works at three common gain sizes (all assume long-term gains and a single filer).

Example A — A $10,000 Long-Term Gain (Middle-Income Single Filer)

Say you’re single with $60,000 in taxable income from your job, and you realize a $10,000 long-term gain. Your income is above the 0% ceiling ($49,450) but well under the 15%/20% line ($545,500), so the entire gain falls in the 15% band. Tax: 15% × $10,000 = $1,500. (Had this been a short-term gain, it would have been taxed at your 22% ordinary rate — $2,200.)

Example B — A $100,000 Long-Term Gain

Now suppose you’re single with $80,000 of ordinary taxable income and you realize a $100,000 long-term gain. Stacked on top, your gain runs from $80,000 up to $180,000 of total taxable income — all of it inside the 15% band (which tops out at $545,500). So the whole gain is taxed at 15%: 15% × $100,000 = $15,000. Your MAGI here ($180,000) is below the $200,000 NIIT threshold, so no extra 3.8% applies.

Example C — A $300,000 Long-Term Gain (Where 20% Kicks In)

Here’s where the top rate appears. Imagine a single filer with $400,000 of ordinary taxable income who realizes a $300,000 long-term gain. The gain stacks from $400,000 to $700,000, straddling the $545,500 line:

• The portion from $400,000 to $545,500 — that’s $145,500 — is taxed at 15% = $21,825.
• The portion from $545,500 to $700,000 — that’s $154,500 — is taxed at 20% = $30,900.
• Long-term capital gains tax so far: $52,725.

On top of that, because MAGI is far above $200,000, the 3.8% NIIT applies to the full $300,000 investment gain: 3.8% × $300,000 = $11,400. Total federal tax on the gain: roughly $64,125. This is exactly why high earners care so much about the strategies in the next section — and why no part of any of these gains is taxed at the 0/15/20 rate by accident. The rate is set by where the gain lands on your income stack.

How to Legally Avoid (or Reduce) Capital Gains Tax — 9 Strategies

This is the part most people are really searching for: how to avoid capital gains tax — legally. The wealthy don’t use secret tricks; they use the same nine strategies below, just at larger scale and with professional help. None of these require breaking any rules.

1. Hold for More Than a Year

Best for: anyone with a profitable position they don’t urgently need to sell. The simplest move of all. Crossing the one-year mark converts a short-term gain (taxed up to 37%) into a long-term gain (taxed at 0/15/20). On a large position, waiting a few extra weeks can be the highest-return decision you make all year.

2. Use the 0% Bracket

Best for: retirees, students, gap-year earners, and anyone with a low-income year. If your taxable income falls below the 0% threshold ($49,450 single / $98,900 married filing jointly in 2026), your long-term gains are taxed at 0%. Some investors deliberately realize gains in low-income years — between jobs, early in retirement before Social Security and required distributions begin — to harvest gains completely tax-free and reset their cost basis higher.

3. Tax-Loss Harvesting

Best for: active investors with both winners and losers. You can sell losing investments to offset your gains dollar-for-dollar. If losses exceed gains, you can deduct up to $3,000 against ordinary income per year and carry the rest forward indefinitely. Watch the wash-sale rule: if you buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is disallowed. Professionals call this the 61-day window — 30 days before the sale, the day of the sale itself, and 30 days after — a span you must keep clear of repurchases to preserve the tax loss. Our deep dive on tax-loss harvesting to cut your tax bill legally walks through the timing.

4. Tax-Advantaged Accounts

Best for: long-term savers building wealth over decades. Inside the right account, gains grow tax-free or tax-deferred and you may owe no capital gains tax at all on the trading inside them. Key options: a Roth or traditional IRA (compare which fits your situation), a 401(k), an HSA — the triple-tax-free wealth tool, and a 529 plan for education savings. A Roth in particular grows entirely tax-free; see our roundup of the best Roth IRA accounts to get started.

5. The Primary-Home Exclusion

Best for: homeowners selling a place they’ve lived in. You can exclude up to $250,000 (single) / $500,000 (married filing jointly) of gain on the sale of your main home. This is one of the most generous breaks in the tax code, and it’s covered in full in the home-sale section below.

6. A 1031 Exchange (Investment Real Estate)

Best for: real estate investors trading up. A 1031 “like-kind” exchange lets you sell an investment property and roll the entire proceeds into another, deferring the capital gains tax indefinitely. Done repeatedly, you can defer tax for a lifetime. The rules are strict on timing and intermediaries — see our 1031 exchange rules guide.

7. Donate Appreciated Stock

Best for: charitable givers with long-held winners. Donate appreciated stock directly to a charity or donor-advised fund and you avoid the capital gains tax entirely and claim a charitable deduction for the full fair-market value. It’s far more tax-efficient than selling, paying the tax, and donating the cash.

8. Gift to Family or Use the Step-Up at Death

Best for: families planning across generations. You can gift appreciated assets to relatives in the 0% or 15% bracket, who may then sell at a lower rate. In 2026 you can give up to $19,000 per recipient (the annual gift exclusion) without touching your lifetime exemption. Even more powerful: assets held until death receive a step-up in basis to their date-of-death value, so heirs can sell with little or no capital gains tax.

9. Opportunity Zones, Installment Sales & QSBS

Best for: large gains and sophisticated planning. Qualified Opportunity Zone funds let you defer and potentially reduce gains reinvested into designated areas. Installment sales spread a gain (and its tax) across several years, which can keep you in lower brackets. And Qualified Small Business Stock (QSBS) can exempt a substantial portion of gains on eligible startup shares. These are advanced; use a professional.

Capital Gains Tax on Selling Your Home

For most people, their home is their largest asset — and the tax code gives it special treatment. When you sell your primary residence, you can exclude a large chunk of the gain from tax entirely.

The 2-Year / 5-Year Rule

To qualify for the full exclusion, you must have owned and lived in the home for at least 2 of the last 5 years before the sale (the two years don’t have to be consecutive). Meet that test and you can exclude up to $250,000 of gain if single or $500,000 if married filing jointly. Only gain above the exclusion is taxable.

Example: a married couple bought their home for $400,000 and sells for $850,000 — a $450,000 gain. Because $450,000 is under their $500,000 exclusion, they owe $0 in federal capital gains tax. If their gain had been $600,000, only the $100,000 above the exclusion would be taxed.

It’s Reusable — Not a One-Time “Lifetime Exemption”

A common myth is that this is a once-in-a-lifetime break. It isn’t. The home-sale exclusion can be reused as often as every two years, as long as you meet the ownership-and-use test each time. There is no separate “lifetime capital gains exemption” for home sales in the U.S. code.

When You Do Owe

You’ll still owe capital gains tax when: your gain exceeds the exclusion; you’re selling a second home or vacation property (which doesn’t qualify); you’re selling a rental property (subject to depreciation recapture); or you didn’t meet the 2-of-5-year test. The IRS spells out the details in Publication 523, Selling Your Home.

Capital Gains on Real Estate, Crypto, Inheritance & Gold

Investment Real Estate

Rental and investment property is taxed differently from your home. On top of regular capital gains, you face depreciation recapture — the depreciation you deducted over the years is taxed at up to 25% when you sell. The main escape hatch is the 1031 exchange, which defers all of it if you reinvest. If you’re building a portfolio, see our guide to investing in real estate in 2026.

Cryptocurrency

The IRS treats crypto as property, so Bitcoin, Ethereum, and other tokens follow the same 0/15/20 long-term and ordinary short-term rates as stocks. New for 2026: Form 1099-DA means crypto brokers now report your transactions directly to the IRS, so accurate records matter more than ever. One quirk worth knowing — the wash-sale rule does not yet apply to crypto, which (for now) makes tax-loss harvesting easier with digital assets. Our 2026 crypto investing guide covers the reporting changes in detail.

Inherited Property

This is the big one for families. Inherited assets get a step-up in basis to their fair-market value on the date of death. So if your parent bought a house for $80,000 and it’s worth $500,000 when you inherit it, your cost basis becomes $500,000 — meaning if you sell soon after for around that value, you owe little or no capital gains tax. The decades of appreciation simply vanish for tax purposes.

Gold & Collectibles

Physical gold, silver, art, coins, and other collectibles are taxed at a higher maximum long-term rate of 28% — not the usual 15% or 20%. (Gold ETFs structured as grantor trusts are generally treated the same way.) Factor this in before you sell; more in our look at whether gold is a good investment in 2026.

Capital Gains Tax for Non-Resident Alien Investors

The rules above apply to U.S. citizens and resident aliens. If you are a non-resident alien (NRA) — a foreign national who does not meet the green card test or the Substantial Presence Test — the treatment of your U.S. investment gains is significantly different.

Stock & Portfolio Investments

Most non-residents are not taxed on gains from trading U.S. stocks, bonds, and other portfolio securities — even if the securities are U.S.-issued. Congress deliberately exempts NRAs from capital gains tax on portfolio investments to encourage foreign capital. If you invest in U.S. markets from abroad and don’t otherwise have a U.S. tax presence, your stock gains are generally outside the U.S. tax net.

The 183-Day Rule for NRAs

There is one important exception. If you are physically present in the United States for 183 or more days during the tax year and you are not already classified as a U.S. resident for tax purposes, any U.S.-source capital gains realized during that year may be taxed at a flat 30% (or the applicable treaty rate, if lower). This is separate from the Substantial Presence Test that determines residency — it is a specific provision targeting short-term high-presence investors.

U.S. Real Estate — FIRPTA

U.S. real estate is never exempt for NRAs. Under the Foreign Investment in Real Property Tax Act (FIRPTA), gains from selling U.S. real property interests are fully taxable for non-residents at the same rates that apply to U.S. persons. Buyers are also required to withhold a portion of the sale proceeds (15% of the gross amount in most cases) and remit it to the IRS as a prepayment. If you are a non-resident investing in U.S. real estate, consult a tax advisor with international experience before selling.

Tax Treaties

The United States has tax treaties with more than 65 countries. These treaties can reduce or eliminate U.S. withholding taxes on dividends, interest, and sometimes capital gains for residents of the treaty country. The treaty provisions vary significantly by country — always verify against the specific treaty language or IRS Publication 901.

Are Capital Gains Taxed by States Too?

Yes — and this surprises people. Most states tax capital gains as ordinary income, stacked on top of the federal tax. Unlike the federal system, the majority of states give no preferential rate for long-term gains. So your true rate is federal + state combined.

California is the steepest: it taxes capital gains as ordinary income at rates up to 13.3%. A California resident in the top federal bracket can pay well over 30% combined on a large gain.

On the other end, nine states have no general state income tax, which means no state tax on capital gains in most circumstances: Florida, Texas, Nevada, Washington, Wyoming, South Dakota, Alaska, Tennessee, and New Hampshire. Each carries a note worth knowing:

• Washington has no general income tax, but does impose a separate tax on long-term capital gains above a threshold (currently $262,000 for 2026), so large gains there are not fully tax-free.
• New Hampshire fully eliminated its Interest and Dividends (I&D) Tax as of January 1, 2025. For tax year 2026, there is no longer any state tax on investment income, including capital gains, in New Hampshire.
• Tennessee repealed its Hall Tax (on investment income) in 2021; by 2026 it has had no income tax on investment gains for several years.

One persistent myth to correct: Mississippi does have a state income tax and taxes capital gains accordingly — don’t assume otherwise.

Frequently Asked Questions

How does capital gains tax work?

It’s a tax on the profit when you sell an asset, calculated as sale price minus your cost basis. You owe nothing while you hold the asset — the tax only triggers when you sell and “realize” the gain. The rate depends on how long you held it and your income.

What are the 2026 capital gains tax rates?

Long-term gains (assets held more than a year) are taxed at 0%, 15%, or 20% depending on your taxable income. Short-term gains (held one year or less) are taxed at ordinary income rates of 10%–37%. High earners may also owe an extra 3.8% NIIT.

Is capital gains tax 15% or 20%?

For most people, it’s 15%. The 0% rate applies to lower taxable incomes (under $49,450 single / $98,900 married filing jointly in 2026), and the 20% rate only applies to high earners above $545,500 single / $613,700 married filing jointly.

How much capital gains tax will I pay on $100,000?

If it’s a long-term gain and the gain falls in the 15% bracket, you’d pay about $15,000. The exact amount depends on your other income, because the gain stacks on top of it — a low enough total income could put some of it at 0%, while a very high income could push part of it to 20% plus the 3.8% NIIT.

How do I get 0% capital gains tax?

Keep your taxable income below the 0% threshold ($49,450 single / $98,900 married filing jointly in 2026) in the year you sell a long-term holding. This is realistic in low-income years — early retirement, between jobs, or while in school — and lets you realize gains completely tax-free.

Can I use capital losses to offset my regular W-2 income?

Yes, partially. If your capital losses exceed your capital gains, you can deduct up to $3,000 of net losses against ordinary income — including wages from a W-2 job — in any single tax year. Losses beyond $3,000 carry forward indefinitely to future tax years, where they can offset future gains or again reduce ordinary income up to the $3,000 annual cap.

Do I pay capital gains tax on stocks if I reinvest the proceeds?

Yes. Reinvesting the proceeds does not defer or eliminate the tax. The taxable event is the sale, not what you do with the money afterward. Whether you deposit the cash, buy new shares, or reinvest dividends, you still owe the capital gains tax in the year you sold. (The exception is inside tax-advantaged accounts like a 401(k) or IRA, where gains are sheltered until withdrawal.)

Does transferring crypto between my own wallets trigger capital gains tax?

No. Moving cryptocurrency between wallets you own — for example, from an exchange to a hardware wallet — is not a taxable event. No sale, exchange, or conversion occurred. Capital gains tax on crypto applies only when you sell it for dollars, swap one token for another, or use it to pay for goods or services. Keep records of all transfers, however, because your cost basis needs to travel with the asset.

What happens if I sell my primary home before living in it for 2 full years?

You generally lose the full exclusion. However, if you sold because of a qualifying unforeseen circumstance — a job relocation, a health issue, or certain other hardships recognized by the IRS — you may qualify for a partial exclusion proportional to the time you did live there. For example, if you lived in the home for one year (half of the required two) and qualify for a partial exclusion, a single filer could exclude up to $125,000 of gain. See IRS Publication 523 for the complete list of qualifying circumstances.

How do the rich avoid capital gains taxes?

They use the same legal strategies available to everyone: holding for the long term, harvesting losses, donating appreciated stock, deferring through 1031 exchanges and Opportunity Zones, and passing assets to heirs who receive a step-up in basis. These are written into the tax code, not loopholes.

Can capital gains tax be deferred or paid in installments?

Yes. A 1031 exchange defers tax on investment real estate, Opportunity Zone funds defer and can reduce gains, and an installment sale spreads the gain — and its tax — across multiple years. Retirement accounts defer tax on gains inside them until withdrawal.

Are capital gains taxed federally or by states?

Both, in most cases. The federal government taxes them at 0/15/20 (long-term) or ordinary rates (short-term), and most states add their own tax, usually treating gains as ordinary income. Nine states have no general income tax, so they generally impose no state capital gains tax — though Washington has a separate levy on large long-term gains.

What is the 2-year, 5-year rule for home sales?

To exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain on your main home, you must have owned and lived in it for at least 2 of the 5 years before the sale. The two years don’t need to be consecutive, and the exclusion can be reused — it’s not a one-time benefit.

Do I pay capital gains tax on inherited property?

Often very little. Inherited assets get a step-up in basis to their value on the date of death, so if you sell soon after inheriting, there’s little or no taxable gain. You’d only owe tax on appreciation that occurs after you inherit.

Did the new Trump/OBBBA law change capital gains rates?

No. The One Big Beautiful Bill (OBBBA), signed July 4, 2025, did not change the 0/15/20 capital gains rates. It made the TCJA ordinary-income brackets permanent and adjusted income thresholds for inflation, but the capital gains structure stayed the same.

Which states have no capital gains tax?

Florida, Texas, Nevada, Wyoming, South Dakota, Alaska, Tennessee, and New Hampshire have no state income tax and therefore no state capital gains tax. New Hampshire fully eliminated its Interest & Dividends Tax as of January 1, 2025, confirming this status. Washington also has no general income tax but does tax high-value long-term gains separately.

How are non-U.S. residents taxed on U.S. capital gains?

It depends on the asset type. Non-resident aliens are generally not taxed on gains from U.S. stocks and portfolio securities if they invest from abroad and have no U.S. tax presence. However, if a non-resident is present in the U.S. for 183+ days in the tax year, U.S.-source gains may be taxed at a flat 30%. U.S. real estate gains are always taxable for non-residents under FIRPTA, and buyers must withhold 15% of the gross sale price. Tax treaties may reduce or eliminate some of these taxes — check the treaty for your country.