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Capital gains tax: What you need to know
When an investment increases in value, the increase is considered a capital gain.
Capital gains are “realized” (and subject to tax) when you sell the investment.
Capital gains are subject to different tax rates depending on how long you owned the investment.
Strategies that can help minimize capital gains taxes include tax-loss harvesting,1 holding investments for over a year, using tax-advantaged accounts, and making charitable donations.
Special capital gain rules may apply to qualifying primary residence sales, qualified small business stock, and inherited assets.
What are capital gains taxes?
Capital gains taxes are taxes you may owe on the profit from selling an investment or asset for more than you paid for it. This tax is only triggered when you “realize” the gain by completing the sale—not while you simply hold the investment.
The amount you owe depends on how long you held the asset: investments held for more than 1 year qualify for a long-term capital gains rate (which is typically lower), while those held for 1 year or less are taxed as short-term gains (at your ordinary income tax rate, which is typically higher).
Investments subject to capital gains taxes include:
- Individual stocks.
- Exchange-traded funds (ETFs).
- Mutual funds.
- Bonds and bond funds.
- Real estate (primary residence, investment properties).
- Collectibles (art, jewelry, coins, antiques).
How much is capital gains tax?
Your capital gain and your tax bracket determine your tax liability. Before you can apply the tax rate, you need to calculate your cost basis—the original purchase price of the investment.
Here’s how it works: If you bought 100 shares of stock at $50 per share (total investment: $5,000) and later sold them at $75 per share (total proceeds: $7,500), your capital gain is $2,500. This $2,500 profit is subject to capital gains tax.
Realized gains vs. unrealized gains
Gains that are “on paper” only are called “unrealized gains.” For example, if you bought a share for $10 and it’s now worth $12, you have an unrealized gain of $2. You won’t pay any taxes until you sell the share.
Unrealized gains could be very important if you invest in funds, however. When you buy shares of a mutual fund or ETF, you're also "buying" a proportional slice of any unrealized gains it has—and you'll be subject to their eventual taxation when the fund sells those positions and distributes the capital gains to shareholders.
Capital gain distributions
A capital gain distribution occurs when a mutual fund or ETF sells securities in its portfolio for a profit and passes those gains to shareholders. You may owe taxes on these distributions even if you haven't sold any shares of the fund yourself.
These distributions are taxed as either long-term capital gains (at the lower capital gains rate) or short-term capital gains (at your ordinary income tax rate), depending on how long the fund held the securities before selling.
Long-term vs. short-term capital gains
Long-term capital gains are gains on investments you owned for more than 1 year. They’re subject to a 0%, 15%, or 20% tax rate, depending on your level of taxable income.
Short-term capital gains are gains on investments you owned for 1 year or less, and they’re taxed at your ordinary income tax rate.
Access essential tax forms, resources, and answers to your most common tax questions
2025 and 2026 capital gains tax rates
In 2025, single filers with taxable income above $48,350 and married filers filing jointly with taxable income above $96,700 are subject to capital gains taxes. In 2026, these limits increase to $49,450 for single filers and $98,900 for married couples filing jointly.
The table below shows 2025 and 2026 long-term capital gains tax rates by income and filing status. Gains realized in 2025 are reported on the tax return you file in 2026; gains realized in 2026 are reported in 2027.
Long-term capital gains tax rates for 2025 and 2026
| Tax rate | Individual filing | Married filing jointly | Married filing separately | Head of household |
| 0% | 2025: $0 to $48,350 2026: $0 to $49,450 |
2025: $0 to $96,700 2026: $0 to $98,900 |
2025: $0 to $48,350 2026: $0 to $49,450 |
2025: $0 to $64,750 2026: $0 to $66,200 |
| 15% | 2025: $48,351 to $533,400 2026: $49,451 to $545,500 |
2025: $96,701 to $600,050 2026: $98,901 to $613,700 |
2025: $48,351 to $300,000 2026: $49,451 to $306,850 |
2025: $64,751 to $566,700 2026: $66,201 to $579,600 |
| 20% | 2025: $533,401 or more 2026: $545,501 or more |
2025: $600,051 or more 2026: $613,701 or more |
2025: $300,001 or more 2026: $306,851 or more |
2025: $566,701 or more 2026: $579,601 or more |
Short-term capital gains tax rates
Short-term capital gains are taxed as ordinary income in line with federal tax brackets, meaning your marginal income tax rate applies. For example, if you’re in the 24% tax bracket for ordinary income, any short-term capital gains will also be taxed at 24%. This is why holding investments for longer than 1 year can result in significant tax savings: Long-term rates are typically lower than ordinary income tax rates for most taxpayers.
Federal capital gains tax
Federal capital gains taxes apply to all U.S. taxpayers regardless of where they live. These are the baseline rates shown in the tables above: 0%, 15%, or 20% for long-term gains, depending on your income level.
However, state taxes may apply separately. Many states also tax capital gains, either as regular income or at special rates. Be sure to check your state’s specific rules when calculating your total tax liability.
How to calculate capital gains tax
Follow these steps to calculate your capital gains tax:
- Determine your proceeds. Start with your sale price and subtract any selling fees (such as broker commissions or transaction costs).
- Find your cost basis. This is your original purchase price plus any purchase fees or commissions.
- Calculate your gain or loss. Subtract your cost basis from your proceeds.
- Determine your holding period. Count the time between your purchase date and sale date. More than 1 year qualifies as long term; 1 year or less is short term.
- Apply the correct tax rate. Use the long-term capital gains rates (0%, 15%, or 20%) if you held the investment for more than 1 year, or your ordinary income tax rate for short-term gains.
- Consider offsets and deductions. Tax-loss harvesting1 can help offset capital gains with realized losses. You may also be able to donate appreciated assets to charity or use tax-advantaged accounts to defer or eliminate certain taxes.
How are capital gains reported?
Realized capital gains for individual securities are reported to you and the IRS on Form 1099-B. Capital gain distributions from funds are reported on Form 1099-DIV.
Special rules and exclusions
Rules around capital gains taxes vary depending on the type of asset, the length of time it was held, and your tax bracket. These are some general exceptions and exclusions to know.
Primary residence exclusion
If you decide to sell a property that you’ve lived in for at least 2 of the past 5 years, you may be able to exclude up to $250,000 if you file individually or $500,000 if you file jointly. That means that if the profit is under these limits, you won’t owe any capital gains tax.
On the other hand, for investment properties, the entire profit from the sale is subject to capital gains tax. The exact amount of tax owed will depend on the length of time the property was owned and the individual’s income.
Small business stock and government bonds
If you hold qualified small business stock for at least 5 years, you may be able to exclude any gains from the sale of the stock from capital gains taxes. Interest from municipal bonds can be exempt.
Inherited investments and property
If you inherit properties or investments, the cost basis is stepped up to the fair market value at the time of the original owner’s passing. As a result, any appreciation in value that occurred during their lifetime isn’t subject to capital gains taxes.
High-income earners
The net investment income tax (NIIT) is a 3.8% tax that applies to trusts, estates, and high-income individuals on certain types of investment income. You qualify as a high-income taxpayer if you earn:
- $200,000 and are filing individually or as head of household.
- $250,000 and are married filing jointly.
- $125,000 and are married filing separately.
Investment income that NIIT applies to includes but isn’t limited to:
- Interest, dividends, and capital gains from stocks, bonds, mutual funds, and other holdings.
- Rental and royalty income.
- Nonqualified annuity distributions.
- Income from real estate investments and limited partnerships.
Contact a tax advisor if you’re wondering whether the above exceptions are applicable to your situation. We have answers for general tax questions here.
Understand how your investments are taxed, from dividends to capital gains
Strategies to minimize capital gains taxes
Planning ahead and choosing tax strategies that are right for you can help minimize the taxes you pay on capital gains. Here are a few to consider.
Tax-loss harvesting
Tax-loss harvesting1 works to help reduce your capital gains taxes by using realized losses to offset realized gains. The money you save on taxes can then be reinvested, giving you the chance to potentially increase the value of your savings.
Holding investments for over a year
Investments held for longer than a year are subject to lower capital gains tax rates compared to those held for less than a year.
Using tax-advantaged accounts
Accounts like IRAs and 401(k)s offer tax-deferred growth—meaning taxes aren’t due until funds are withdrawn. Withdrawals, if taxable, are subject to ordinary income tax.
Charitable donations
Charitable donations are tax-deductible. Donating appreciated assets can help minimize capital gains taxes.
Wondering which of these strategies are right for you? A financial advisor can help.
Frequently asked questions about capital gains tax
You pay capital gains tax in the year you sell the investment and realize the gain. For example, if you sell stocks in 2026, you’ll report those gains on your 2026 tax return, which you file in 2027. The tax is due when you file that return (typically by April 15) or through quarterly estimated tax payments if you’re self-employed or have significant investment income.
No, you don’t pay capital gains tax on unrealized gains (profits that exist on paper while you still hold the investment). However, there are exceptions: If you own mutual funds or ETFs, you may owe taxes on gains the fund realizes internally and distributes as capital gain distributions from the fund.
Yes, capital gains are considered a form of income for tax purposes. However, they’re treated differently than wages, salaries, or business income. Long-term capital gains receive preferential tax treatment with lower rates (0%, 15%, or 20%), while short-term capital gains are taxed as ordinary income at your regular tax bracket. Both types are reported on your tax return and factor into your total taxable income.
Ordinary income includes wages, salaries, bonuses, self-employment income, interest, and short-term capital gains—all taxed at regular income tax rates ranging from 10% to 37%. Capital gains, specifically long-term capital gains, are profits from investments held for more than 1 year and receive preferential tax treatment with lower rates (0%, 15%, or 20%).
Find out how Vanguard Advice can help you build a tax-efficient plan