Capital Gains: Short-Term vs Long-Term 2026
The three preferential federal rates only apply if you held the asset more than one year. Here is the full 2026 picture, with the math that surprises most investors.
The short answer
Hold an asset more than one year and the gain is long-term, taxed at the preferential federal rates of 0%, 15%, or 20%. Sell within a year and it is short-term, taxed as ordinary income up to 37%. High earners add a 3.8% NIIT surtax on top.
2026 tax year. NIIT thresholds are not inflation-indexed. Some states tax gains separately.
Selling a stock, mutual fund, or non-primary-residence property creates a capital gain or loss. How that gain gets taxed depends almost entirely on one number: how long you held the asset before selling. Hold for more than a year and you get the federal preferential rates, three brackets capped at twenty percent. Sell within a year and the gain stacks onto your ordinary income at your regular marginal rate, which can run as high as thirty-seven percent for top earners. The gap between those two outcomes, sometimes seventeen percentage points, is why the holding-period rule shapes nearly every retail investor's tax planning.
The Holding-Period Rule
If you hold a capital asset for more than one year before selling, the gain is long-term and qualifies for the preferential federal brackets. Held for one year or less, the gain is short-term and is taxed as ordinary income at your regular federal marginal bracket (10-37% in 2026).
The one-year clock runs from the day after acquisition to the day of sale. So a stock bought on June 14, 2025 must be sold on June 15, 2026 or later to qualify as long-term. December-31 versus January-1 trade timing can shift a sale across the threshold, which is why advisors so often nudge clients to delay year-end sales by a single trading day when the holding period is borderline.
2026 Long-Term Capital Gains Rates (Federal)
Three bracket tiers, with thresholds based on total taxable income including the gain:
| Filing Status | Zero-Rate Tier (Ceiling) | Mid-Rate Tier (Range) | Top-Rate Tier (Floor) |
|---|---|---|---|
| Single | Up to $48,350 taxable income | From the zero-rate ceiling up to $533,400 | Above $533,400 |
| Married Filing Jointly | Up to $96,700 | From there up to $600,050 | Above $600,050 |
| Married Filing Separately | Up to half the joint ceiling | From there up to $300,025 | Above $300,025 |
| Head of Household | Up to $64,750 | From there up to $566,700 | Above $566,700 |
The thresholds apply to total taxable income including the gain, not just the gain by itself. The gain stacks on top of ordinary income for the purpose of finding the bracket, then gets taxed at the preferential rate of whichever bracket(s) it falls in. A worked example below makes this concrete.
The Bracket-Stacking Mechanic
This is the part that trips up most filers. Suppose a single filer has $40,000 of wage income and $20,000 of long-term capital gain. Total taxable income is $60,000. The wages fill the bracket schedule from the bottom; the gain stacks on top. So:
- The first $40,000 is wage income, taxed at ordinary rates on the regular bracket schedule
- The next $8,350 of the gain falls in the zero-rate LTCG tier (the gap from wage level up to the single-filer ceiling)
- The remaining $11,650 of the gain falls in the mid-rate LTCG tier
So part of the gain pays no federal income tax at all, while the rest pays the mid-rate fifteen percent. Total LTCG tax: $11,650 × 0.15 = $1,748. The same gain in the same dollar amount can produce wildly different tax depending on the wage income that sits underneath it.
Net Investment Income Tax (NIIT)
An additional Net Investment Income Tax of three-point-eight percent applies to investment income (long-term and short-term capital gains, dividends, rental income, interest) for taxpayers with modified AGI above:
- $200,000 single filer
- $250,000 married filing jointly
- $125,000 married filing separately
Critical point: those NIIT thresholds have been frozen since 2013. Unlike most other tax parameters, they are not indexed to inflation. A $200K single threshold from 2013 in 2026 dollars equals roughly $263K, meaning the surtax now reaches deeper into the upper-middle-income bracket each year that wages drift up but the threshold does not. The Tax Foundation has documented this drag pulling more filers into NIIT each year through pure non-indexation.
Worked Example 1: $100,000 Long-Term Gain (Single, $80K Wages)
A founder selling vested startup equity after 13 months. Wage income $80,000, long-term capital gain $100,000:
| Step | Detail | Amount |
|---|---|---|
| Total taxable income | $80K wages + $100K LTCG | $180,000 |
| Zero-rate LTCG tier? | Wages already exceed the single-filer ceiling, none of the gain qualifies | nothing at zero rate |
| Mid-rate LTCG tier | Cumulative income $80K-$180K is well below the top-rate floor, entire gain falls here | $100K × 0.15 = $15,000 |
| NIIT surtax | Modified AGI $180K is below the single threshold, no surtax | none |
| Federal income tax on wages | $80K single, standard deduction | ~$8,770 |
| Total federal tax | ~$23,770 | |
Worked Example 2: $50,000 Gain at $250K Wages (NIIT Bites)
Same gain, but the higher wage base now triggers NIIT:
| Step | Detail | Amount |
|---|---|---|
| Total taxable income | $250K wages + $50K LTCG | $300,000 |
| Mid-rate LTCG tier | Cumulative income $250K-$300K, all below the top-rate floor | $50K × 0.15 = $7,500 |
| NIIT surtax | Modified AGI $300K exceeds the single threshold; the gain is investment income | $50K × 0.038 = $1,900 |
| Total federal tax on the gain alone | $9,400 (effective 18.8%) | |
That 18.8% effective rate on long-term gains is a number every high-earner should commit to memory. It is also why the spread between long-term and short-term capital gains tax narrows but does not disappear at the upper income tiers, short-term gains in the same scenario would have been taxed at the fifth ordinary bracket plus the NIIT surtax, totaling about thirty-eight-point-eight percent.
State Capital Gains Treatment
Most states tax capital gains as ordinary income at the regular state rate, no preferential treatment. California, New York, New Jersey, Hawaii, and Massachusetts apply their full marginal bracket schedule to long-term gains. Most no-income-tax states impose no state capital gains tax either.
The exception is Washington. Since 2022, the state imposes a 7% tax on long-term capital gains above $269,000 in 2026 (excluding real estate, retirement accounts, and qualified small-business stock). The state Supreme Court upheld this in 2023; it remains in effect for the 2025 and 2026 tax years and stacks on top of federal. See the Washington state page for the full rules.
Short-Term Gains and the Wash-Sale Rule
Short-term capital gains, anything held a year or less, are taxed at your ordinary federal marginal rate, which means top-bracket investors can pay the top ordinary rate plus the investment-income surtax, for an effective forty-point-eight percent. This is the strongest argument for buy-and-hold strategies in taxable accounts: time-shifting a sale across the one-year line can save ten to twenty-five percentage points.
One related rule traps active traders: the wash-sale rule disallows a loss deduction if you repurchase substantially identical securities within 30 days before or after the sale. The disallowed loss is added to the new basis, deferring rather than eliminating the deduction, but the timing impact on year-end tax-loss harvesting can be material.
FAQ
Do qualified dividends use the same rates as long-term capital gains?
Yes. Qualified dividends are taxed at the same three preferential federal brackets and use the same income thresholds. The qualifying tests are different, primarily a 60-day holding period for the underlying stock, but the rate schedule is identical.
What counts as a capital asset?
Stocks, bonds, mutual fund shares, ETF shares, real estate (other than your primary residence, which gets its own §121 exclusion), collectibles (art, coins, antiques, taxed at up to 28%), and most personal property held for investment. Inventory in a business is not a capital asset; gains there are ordinary.
Can I offset gains with losses?
Yes. Capital losses offset capital gains dollar-for-dollar within the same year, with short-term losses netted against short-term gains and long-term losses against long-term gains first. Net excess losses can offset up to $3,000 of ordinary income per year ($1,500 married filing separately), with any remainder carried forward indefinitely. This is the foundation of tax-loss harvesting.
How does the primary-residence exclusion work?
Section 121 excludes up to $250,000 of capital gain ($500,000 married jointly) from the sale of a primary residence, provided you owned and lived in the home for at least 2 of the last 5 years. Excess gain is taxed at long-term rates (assuming you held more than a year, which is nearly always the case for a home).
Sources
- IRS Revenue Procedure 2025-32 - 2026 LTCG thresholds
- IRC §1411, Net Investment Income Tax (3.8%)
- Washington Department of Revenue, Capital Gains Tax FAQ
- IRC §121, Primary Residence Exclusion