Capital Gains Tax

Capital gains tax is the tax the IRS charges on the profit from selling a capital asset for more than you paid. The asset does not matter much; the holding period does. Sell within one year and the gain is short-term, taxed as ordinary income at rates up to 37%. Sell after more than one year and the gain is long-term, taxed at 0%, 15%, or 20% depending on taxable income. Gains are unrealized until you sell, and unrealized gains are never taxed, which makes holding itself a form of tax deferral.

Three US specifics sit on top. The net investment income tax adds 3.8% above $200,000 of modified income for single filers and $250,000 for joint filers. Home sales carry a separate exclusion of $250,000 single and $500,000 joint on a primary residence. And inherited assets receive a step-up in basis that erases the unrealized gain entirely.

The mechanism runs on the calendar and on taxable income. The holding period starts the day after the trade settles, and a gain held one year and one day crosses into long-term treatment. The rate is then set by taxable income, not by the gain alone. For 2026, the 0% long-term bracket runs up to roughly $49,450 of taxable income for single filers and $98,900 for joint, the 15% bracket runs to roughly $545,500 single and $613,700 joint, and the 20% rate applies above. The 0% bracket is real: a retiree with modest income can sell appreciated shares and owe nothing federally.

Losses run through the same pipeline in reverse. Realized losses cancel realized gains dollar for dollar, up to $3,000 of the remainder can offset ordinary income each year, and the rest carries forward indefinitely. Selling losers in the same year as winners is the mechanism behind tax-loss harvesting, and the wash-sale rule bans repurchasing the same security within 30 days on either side of the sale.

Inside a 401(k), traditional IRA, or Roth IRA, none of this applies: gains compound untaxed, and the account's own rules govern the eventual tax. In a taxable brokerage, the deferral is the lever. Hold for a year, hold for decades, and the tax bill stays unrealized until the sale, at rates that reward the wait.

Every taxable sale in America runs through this schedule, and the difference between the two tiers is the largest legal return boost available to an investor. A one-day difference in holding period can nearly double the tax on an identical gain. Frequent traders pay the expensive rate on everything; buy-and-hold investors pay the cheap one on almost everything.

I watched a colleague named Brent (yes, that Brent) sell a position at eleven months and nineteen days for reasons he described as technical. The gain was $8,000, the bracket 24%, and the bill $1,920. Held five weeks longer it would have been taxed at 15%: $1,200. His chart cost him $720.

The highest-leverage thing most Americans can do is hold appreciated assets past the one-year line, harvest losses deliberately, and park high-turnover strategies inside tax-advantaged accounts where the schedule never applies. Run the arithmetic first with the capital gains tax calculator or the tax-loss harvesting calculator.