What Is Capital Gains Tax: Definition, Rates, Examples, and How It Works
Introduction
When you sell an investment or asset for more than you paid for it, that profit is known as a “capital gain” — and in many cases, you’ll owe tax on that gain. That tax is called the capital gains tax. Understanding how it works helps you plan better, avoid surprises and potentially reduce the amount you pay. In this article — published on BestStock AI — we’ll explain what capital gains tax means, how it’s calculated, the difference between short‑ and long‑term gains, current rate tables for 2025 and 2026, special cases and smart planning ideas.
What Is Capital Gains Tax?
A capital gain occurs when you sell or dispose of a capital asset — for example stocks, bonds, real estate (excluding your main home under specific rules), or other property — and you receive more than your “basis” (typically what you paid plus related costs). The tax on that gain is called the capital gains tax.
Example: Suppose you bought 100 shares of a company at $50 each (so you spent $5,000). A year later you sell them for $70 each, netting $7,000. Your gain is $2,000. That $2,000 is subject to capital gains tax (assuming no other offsetting factors).
The key considerations:
- How long you held the asset (short‑term vs long‑term)
- Your taxable income and filing status
- Any deductions, losses or special rules that apply
According to the Internal Revenue Service (IRS) Topic 409, for taxable years beginning in 2024 the highest rate on most net capital gains is 15% for “most individuals.”
Short‑Term vs Long‑Term Capital Gains
Short‑Term Gains
Short‑term capital gains are gains from assets you’ve held for one year or less. These gains are taxed at your ordinary income tax rate — the same rate you pay on wages, salaries, business income, etc.
Example: You buy a mutual fund in March, sell it in December (10 months later) for a gain of $1,000. Because the holding period is under one year, it’s a short‑term gain and the $1,000 is taxed at your ordinary income rate (say 22% or 24% depending on income).
Long‑Term Gains
Long‑term capital gains come from assets held for more than one year. These gains benefit from special, lower tax rates (0%, 15% or 20% in many cases) rather than the full ordinary income rate.
Example: You purchase a piece of artwork for $10,000 and sell it 18 months later for $15,000. The $5,000 gain qualifies as a long‑term capital gain and is taxed at the long‑term rate applicable to your income.
The reason the holding period matters is because the law is designed to reward longer‑term investment rather than frequent trading.
Capital Gains Tax Rates in 2025 and 2026
Long‑Term Capital Gains Tax Rates — 2025
| Tax Rate | Single (Taxable Income) | Married Filing Jointly (Taxable Income) | Head of Household (Taxable Income) |
|---|---|---|---|
| 0% | Up to $48,350 | Up to $96,700 | Up to $64,750 |
| 15% | $48,351 – $533,400 | $96,701 – $600,050 | $64,751 – $566,700 |
| 20% | Over $533,400 | Over $600,050 | Over $566,700 |
Long‑Term Capital Gains Tax Rates — 2026
| Tax Rate | Single (Taxable Income) | Married Filing Jointly (Taxable Income) | Head of Household (Taxable Income) |
|---|---|---|---|
| 0% | Up to $49,450 | Up to $98,900 | Up to $66,200 |
| 15% | $49,451 – $545,500 | $98,901 – $613,700 | $66,201 – $579,600 |
| 20% | Over $545,500 | Over $613,700 | Over $579,600 |
Short‑Term Capital Gains Tax Rates — 2025
Short‑term gains are taxed as ordinary income. Here are the federal ordinary income tax brackets for tax year 2025 by filing status:
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 10% | $0 – $11,925 | $0 – $17,000 | $0 – $23,850 | $0 – $11,925 |
| 12% | $11,926 – $48,475 | $17,001 – $64,850 | $23,851 – $96,950 | $11,926 – $48,475 |
| 22% | $48,476 – $103,350 | $64,851 – $103,350 | $96,951 – $206,700 | $48,476 – $103,350 |
| 24% | $103,351 – $197,300 | $103,351 – $197,300 | $206,701 – $394,600 | $103,351 – $197,300 |
| 32% | $197,301 – $250,525 | $197,301 – $250,500 | $394,601 – $501,050 | $197,301 – $250,525 |
| 35% | $250,526 – $626,350 | $250,501 – $626,350 | $501,051 – $751,600 | $250,526 – $375,800¹ |
| 37% | Over $626,350 | Over $626,350 | Over $751,600 | Over $375,800¹ |
¹Bracket for Married Filing Separately in 2025 is less clearly defined but shown up to $375,800 in available sources.
Short‑Term Capital Gains Tax Rates — 2026
| Tax Rate | Single (Taxable Income) | Married Filing Jointly (Taxable Income) | Head of Household (Taxable Income) | Married Filing Separately (Taxable Income) |
|---|---|---|---|---|
| 12% | $12,401 – $50,400 | $24,801 – $100,800 | $17,701 – $67,450 | $12,401 – $50,400 |
| 22% | $50,401 – $105,700 | $100,801 – $211,400 | $67,451 – $105,700 | $50,401 – $105,700 |
| 24% | $105,701 – $201,775 | $211,401 – $403,550 | $105,701 – $201,750 | $105,701 – $201,775 |
| 32% | $201,776 – $256,225 | $403,551 – $512,450 | $201,751 – $250,500 | $201,776 – $256,225 |
| 35% | $256,226 – $640,600 | $512,451 – $768,700 | $250,501 – $626,350 | $256,226 – $640,600 |
| 37% | Over $640,600 | Over $768,700 | Over $626,350 | Over $640,600 |
Source: IRS
How Capital Gains Are Calculated
To figure out your taxable capital gain, the basic steps are:
- Determine your basis (what you paid + allowable costs)
- Subtract basis from sale proceeds = gain (or loss)
- Subtract any loss offsets (capital losses can offset gains and up to $3,000 of ordinary income)
- Classify the gain as short‑term or long‑term based on your holding period
- Apply the appropriate tax rate (see tables above)
- Report on your tax return (Form 1040 in the U.S.)
Example: You bought 200 shares of Company XYZ at $30 each ($6,000 basis). You sell them two years later for $45 each ($9,000 proceeds). Gain = $3,000. Since you held them over one year, it qualifies as long‑term. If you are single and your taxable income puts you in the 15% long‑term bracket, you’ll pay $3,000 × 15% = $450 capital gains tax (ignoring state taxes and other adjustments).
Note: If your total gains plus other income push you into a higher threshold listed in the tables above, the rate could shift to 20%. Also high‑income taxpayers may owe the 3.8% Net Investment Income Tax (NIIT) on certain investment income.
Special Cases and Exceptions
While the standard rules cover many situations, there are important exceptions to be aware of:
- Collectibles (art, coins, antiques): Gains from these may be taxed at a maximum 28% rather than the standard 20% cap for long‑term gains.
- Qualified Small Business Stock (under §1202): Some of these gains may qualify for special treatment.
- Home Sale Exclusion: If you sell your main home and meet certain ownership and use tests, you may exclude up to $250,000 of gain (single filer) or $500,000 (married filing jointly) under § 121 of the Internal Revenue Code.
- Retirement accounts: Gains inside an IRA or 401(k) aren’t taxed when the gain happens — you’ll pay ordinary income tax when distributions are taken (assuming a tax‑deferred account).
- Depreciation recapture on real estate: If you sell investment real estate and you’d claimed depreciation, part of the gain may be “recaptured” and taxed at a special maximum of 25%.
Because these exceptions involve particular rules and thresholds, it’s wise to consult a tax advisor if one applies to you.
Tax Planning Strategies
Here are practical ideas to keep in mind — remember, these are basic and not a substitute for personalized advice:
- Hold investments more than one year: If you can wait just into the “long‐term” territory, you might pay significantly less tax.
- Offset gains with losses: If you’ve realized gains, look for opportunities to harvest losses (sell losing positions) to offset them.
- Be aware of your income level: Since thresholds matter, you may plan sales in years when your income is lower, thereby accessing the 0% or 15% rate rather than 20%.
- Use tools: Estimate what you’ll owe using an online calculator — for example, BestStock AI’s Capital Gains Tax Calculator helps you plug in your gain, holding period, filing status and income to estimate tax.
- Watch special rules and timing: For example, the “wash sale rule” prevents you from claiming a loss if you buy substantially identical securities within 30 days of the sale. Also, plan for possible policy changes starting 2026.
Conclusion
The capital gains tax is an important piece of your investing and tax planning puzzle. Knowing what it is, how holding period matters, the current rate structure (2025 & 2026), how to calculate your gain, and some exceptions and basic strategies gives you more control. Using tools like the BestStock AI calculator and keeping your income levels and holding periods in mind can help you make smarter decisions. A little planning now can go a long way toward keeping more of your gains.