How to Calculate Capital Gains Tax in 2026

When you sell an investment for more than you paid, the profit is a capital gain, and the IRS wants its share. How much you owe depends on how long you held the asset, your total taxable income, and your filing status. With the right knowledge, you can structure your sales to minimize taxes legally and keep more of your investment profits. This guide covers the 2026 capital gains tax rates, calculation methods, and proven strategies for tax-efficient investing.

What Is Capital Gains Tax?

Capital gains tax is the tax levied on the profit from selling a capital asset. Capital assets include stocks, bonds, mutual funds, ETFs, real estate, collectibles, and virtually any property held for investment or personal use. The tax is owed only when a gain is realized, meaning you have actually sold the asset. Unrealized gains (paper profits on assets you still hold) are not taxed.

The amount of capital gains tax you owe depends on two factors: the holding period (how long you owned the asset) and your taxable income in the year of sale. These two variables determine whether your gain is classified as short-term or long-term, which significantly affects the tax rate.

Your basis in an asset is generally the purchase price plus any transaction costs (commissions, fees). The capital gain is calculated as the sale proceeds minus the adjusted basis. If you sell for less than your basis, you have a capital loss, which can offset gains and reduce your tax bill.

Short-Term vs Long-Term Capital Gains

Short-term capital gains apply to assets held for one year or less. These gains are taxed at your ordinary income tax rate, which ranges from 10% to 37% in 2026 depending on your total taxable income. For high earners, this means short-term gains can be taxed at rates more than double what long-term gains would cost.

Long-term capital gains apply to assets held for more than one year. These gains receive preferential tax rates of 0%, 15%, or 20%, depending on your taxable income and filing status. The preferential rates are designed to encourage long-term investment and reward patient capital allocation.

The difference in rates is substantial. A single filer in the 32% ordinary income bracket pays 32% on short-term gains but only 15% on long-term gains, saving $170 per $1,000 of profit. Over a portfolio of meaningful size, this holding period distinction can save tens of thousands of dollars annually.

2026 Capital Gains Tax Rates

Long-Term Capital Gains Brackets (Single)

Long-Term Capital Gains Brackets (Married Filing Jointly)

Net Investment Income Tax (NIIT)

In addition to the base capital gains rate, high-income taxpayers may owe the 3.8% Net Investment Income Tax. This applies to individuals with modified adjusted gross income (MAGI) exceeding $200,000 (single) or $250,000 (married filing jointly). The NIIT is calculated on the lesser of net investment income or the amount by which MAGI exceeds the threshold. This means the maximum combined long-term capital gains rate is 23.8% (20% + 3.8% NIIT) for the highest earners.

How to Calculate Capital Gains Tax

Follow these steps to determine your capital gains tax liability:

Step 1: Determine your basis. This is your purchase price plus any commissions or fees paid when buying the asset. For mutual funds, remember to include reinvested dividends in your basis if they were taxed in prior years.

Step 2: Calculate the gain. Subtract your adjusted basis from the sale proceeds (net of selling costs). Sale proceeds of $50,000 minus a basis of $30,000 equals a $20,000 capital gain.

Step 3: Determine the holding period. Count from the day after acquisition to the sale date. More than 365 days qualifies as long-term.

Step 4: Identify the applicable rate. For short-term gains, use your ordinary income tax bracket. For long-term gains, use the 0%/15%/20% rate table based on your total taxable income (including the gain itself).

Step 5: Check for NIIT. If your MAGI exceeds $200,000 (single) or $250,000 (MFJ), add 3.8% NIIT on the applicable amount.

Real-World Examples

Example 1: Stock Sale at 0% Rate. Claire is a single filer with $35,000 in wages and $10,000 in long-term capital gains from selling index fund shares she held for three years. After the $16,100 standard deduction, her taxable income is $28,900 ($18,900 from wages + $10,000 gain). Since her total taxable income is below the $49,450 threshold, her entire $10,000 long-term gain is taxed at 0%. She owes no capital gains tax and keeps the full profit.

Example 2: Mixed Short-Term and Long-Term. Marcus earned $120,000 in salary, realized $8,000 in short-term gains from day trading, and $25,000 in long-term gains from selling shares held for two years. His short-term gains are taxed at his 24% ordinary rate ($1,920). After the standard deduction, his taxable income including gains is $136,900, placing his long-term gains in the 15% bracket ($3,750). His total capital gains tax is $5,670. If he had held the day-traded stocks for one more year, the short-term gains would have been taxed at 15% instead, saving him $720.

Example 3: High Earner With NIIT. Sophia has $300,000 in salary and sells rental property for a long-term gain of $200,000. Her total MAGI is $500,000. Her long-term gain is taxed at 20% ($40,000). Additionally, her MAGI exceeds the $200,000 NIIT threshold by $300,000, and her net investment income is $200,000. The NIIT is 3.8% of the lesser amount ($200,000), adding $7,600. Her total tax on the capital gain is $47,600, an effective rate of 23.8%.

Capital Gains on Real Estate

Real estate receives special treatment under the tax code. The most significant benefit is the Section 121 exclusion for primary residences: single filers can exclude up to $250,000 in capital gains, and married couples filing jointly can exclude up to $500,000, provided the home was the owner's primary residence for at least two of the five years preceding the sale.

For investment properties, there is no Section 121 exclusion. However, investors can use a Section 1031 like-kind exchange to defer capital gains tax by reinvesting the proceeds into a similar investment property within specific timelines (45 days to identify, 180 days to close). This strategy allows investors to grow their real estate portfolio without triggering immediate tax liability.

Real estate also involves depreciation recapture. If you claimed depreciation deductions on a rental property, the IRS recaptures that depreciation at a flat 25% rate when you sell. This is separate from and in addition to the capital gains tax on the remaining profit.

Strategies to Minimize Capital Gains Tax

Hold for more than one year. The simplest strategy is ensuring your holding period exceeds 12 months. This converts short-term gains (taxed at up to 37%) into long-term gains (taxed at 0%, 15%, or 20%). The savings can be dramatic at any income level.

Harvest losses to offset gains. If some investments are underwater, selling them generates capital losses that offset capital gains dollar for dollar. Excess losses can offset up to $3,000 of ordinary income annually, with the remainder carried forward. Many investors review their portfolios in November and December specifically for tax-loss harvesting opportunities.

Use the 0% bracket strategically. Single filers with taxable income below $49,450 pay 0% on long-term capital gains. Retirees, students, or anyone in a temporarily low-income year can harvest gains at 0% to reset their cost basis higher, eliminating future tax liability on those gains.

Invest through tax-advantaged accounts. Capital gains within Roth IRAs, traditional IRAs, and 401(k)s are not taxed when realized. Placing high-growth, high-turnover investments in these accounts avoids capital gains tax entirely (Roth) or defers it until withdrawal (traditional).

Gift appreciated assets. Donating appreciated stock to a qualified charity lets you deduct the full fair market value while avoiding capital gains tax entirely. You receive the double benefit of a charitable deduction and zero tax on the gain. For gifts to individuals, the recipient takes your basis and holding period.

Consider installment sales. Spreading the proceeds of a large sale over multiple tax years through an installment sale can keep your taxable income in lower brackets, potentially reducing both the capital gains rate and exposure to NIIT.

Common Mistakes to Avoid

Ignoring the wash-sale rule. If you sell a stock at a loss and buy back the same or substantially identical security within 30 days (before or after), the loss is disallowed for tax purposes. Many investors inadvertently trigger wash sales through automatic dividend reinvestment programs.

Forgetting about state capital gains taxes. While this article focuses on federal rates, many states also tax capital gains. California taxes long-term gains at the same rate as ordinary income (up to 13.3%). Always factor state taxes into your capital gains projections.

Miscalculating basis in mutual funds. Mutual fund investors who reinvest dividends often forget to include those reinvested amounts in their basis. This leads to double taxation: once when the dividend is received and again when the shares are sold. Keep meticulous records or use the average cost method offered by most brokerages.

Selling just before the long-term threshold. Selling an asset one day too early can cost thousands in extra taxes. Always verify the acquisition date before executing a sale, especially for positions approaching the one-year mark.

Last updated: February 23, 2026