Being in the green when you sell your investments can come with a tax bill. Here's what you need to know about these so-called capital gains—plus the short-term and long-term capital gains tax rates that may apply depending on how long you held your assets.
What are capital gains?
Capital gains are the profit you make from selling a capital asset (such as an investment like a stock, mutual fund, cryptocurrency, property, or ETF) for more than you bought it. For example, if you bought a stock for $100 and later sold it for $150, you would have a capital gain of $50. Capital gains are important to stay on top of because the IRS considers them income, meaning they may be subject to taxes.
What is capital gains tax?
Capital gains tax is the tax you may have to pay on the profits of investments you've sold in the current tax year. Like income taxes, capital gains taxes vary based on your overall income level. The exact amount you pay is determined by 2 other important factors:
- How much you originally paid for an investment, plus adjustments (broker's fees, commissions, return of capital, etc.)
- When you bought it
The former is important to know as it sets the "cost basis" for the investment, or the benchmark used for determining how much profit or loss resulted from the sale. (Refer to your brokerage account for your actual cost basis—it can be adjusted as you add to the position such as through dividend reinvestment programs or for other reasons like wash sales.)
Meanwhile, the amount of time you've owned the investment determines whether you have what are known as short-term or long-term capital gains and if you may be taxed at the short-term or long-term capital gains tax rate.
Long-term vs. short-term capital gains
A long-term capital gain is the profit on the sale of an investment you've held for longer than a year. For example, if you bought a stock on September 15, 2024, and sold that stock on October 14, 2025, any profit from that sale would be considered a long-term capital gain. Long-term capital gains are not taxed the same as ordinary income and instead have their own tax rates. These rates are determined based on taxable income (after deductions are applied) and are typically less than your income tax rates. Long-term capital gains may also be subject to state and local taxes. Long-term federal capital gains tax rates run from 0% to 20%.
A short-term capital gain is the profit on the sale of an investment you've held for a year or less. Continuing the example above, if you instead held the investment until September 14, 2025, any profit from selling that stock would be considered a short-term capital gain. Unlike long-term capital gains, short-term capital gains are typically taxed the same as ordinary income, which is higher than long-term federal capital gains tax rates. Short-term capital gains may also be subject to state and local taxes at income tax rates. Short-term federal capital gains tax rates range from 10% to 37%.
High-income earners may be subject to an additional 3.8% tax called the net investment income tax on both short- and long-term capital gains.
Realized gains vs. unrealized gains
A realized gain results from selling an investment for a profit. For example, if you bought a stock at $12 and sold it for $17, your realized gain is $5. An unrealized gain is a profit on paper only. That is, you bought a stock at $12 and it's now worth $17, but you haven't sold it. You pay capital gains only on realized gains.
In the case of mutual funds, if the fund manager sold assets for a profit, it is considered a realized gain and therefore, taxable. Mutual fund shareholders must pay capital gains taxes even if they didn't sell any shares or if they reinvested the gains because the fund has realized gains. The fund must pass those gains onto shareholders at least once a year by law.
An important note: Capital gains taxes, even on mutual funds, do not apply to investments held in tax-advantaged accounts, like 401(k)s and other employer-sponsored retirement plans, individual retirement accounts (IRAs), 529s, and health savings accounts (HSAs). For those types of accounts, you typically incur taxes only when you take withdrawals. (State rules may vary.)
Capital losses
Capital gains tax is only owed on net capital gains, meaning any losses incurred throughout the year can reduce your capital gains tax liability. (See tax-loss harvesting below on how to increase losses to offset gains.)
Losses are applied in a specific order. Short-term losses offset short-term gains while long-term losses offset long-term gains. Any remaining losses of a given holding period are then used to offset any remaining gains of a different holding period. Resulting gains are subject to capital gains tax. Resulting losses can be used to offset ordinary income, generally up to $3,000 a year. Any further remaining losses can be carried forward to future tax years.
How to calculate capital gains tax
- Figure out the investment's cost basis, including any fees.
- Subtract the cost basis from what you sold the investment for.
- If you held the investment for more than a year, you will pay long-term capital gains tax on any profit. If you held it for a year or less, you will pay short-term capital gains tax.
- Multiply your gain by the appropriate tax rate. (Check the tables that follow.)
2026 capital gains tax rates
Long-term capital gains tax rates 2026
| Capital gains tax rate | Single (taxable income) | Married filing separately (taxable income) | Head of household (taxable income) | Married filing jointly (taxable income) |
| 0% | Up to $49,450 | Up to $49,450 | Up to $66,200 | Up to $98,900 |
| 15% | Over $49,450 to $545,500 | Over $49,450 to $306,850 | Over $66,200 to $579,600 | Over $98,900 to $613,700 |
| 20% | Over $545,500 | Over $306,850 | Over $579,600 | Over $613,700 |
Source: IRS.
Short-term capital gains tax rates 2026
| Short-term capital gains tax rate | Single (taxable income) | Married filing separately (taxable income) | Head of household (taxable income) | Married filing jointly (taxable income) |
|---|---|---|---|---|
| 10% | Up to $12,400 | Up to $12,400 | Up to $17,700 | Up to $24,800 |
| 12% | Over $12,400 to $50,400 | Over $12,400 to $50,400 | Over $17,700 to $67,450 | Over $24,800 to $100,800 |
| 22% | Over $50,400 to $105,700 | Over $50,400 to $105,700 | Over $67,450 to $105,700 | Over $100,800 to $211,400 |
| 24% | Over $105,700 to $201,775 | Over $105,700 to $201,775 | Over $105,700 to $201,775 | Over $211,400 to $403,550 |
| 32% | Over $201,775 to $256,225 | Over $201,775 to $256,225 | Over $201,775 to $256,200 | Over $403,550 to $512,450 |
| 35% | Over $256,225 to $640,600 | Over $256,225 to $384,350 | Over $256,200 to $640,600 | Over $512,450 to $768,700 |
| 37% | Over $640,600 | Over $384,350 | Over $640,600 | Over $768,700 |
Source: Internal Revenue Service. Note: Short-term capital gains rates for 2026 apply to sales of assets you have held for a year or less and are the same as your current federal income tax rate.
How to help reduce capital gains tax
Consider these tips to help reduce the capital gains taxes you may owe.
1. Invest using tax-advantaged accounts when possible.
Remember: Tax-advantaged accounts generally don't generate capital gains taxes federally, and generally not at the state level although individual state rules may apply. So investing in these types of accounts could help you benefit from that major perk. As a bonus, some accounts may offer pre-tax or tax-deductible contributions, potentially reducing your tax liability.
Ready to open a tax-advantaged investment account? Here's how to get started now if you choose Fidelity.
2. Hold on for the long term.
One of the biggest deciding factors in how much you may owe in capital gains taxes is how long you hold those investments. While you may not want to keep all of your investments for over a year, if you're considering a sale near the one-year mark after purchasing an investment, it could make sense to wait longer in order to benefit from the long-term capital gains rate.
According to the IRS, the tax rate on most long-term capital gains is no higher than 15% for most people. And for some, it's 0%. For the highest earners in the 37% income tax bracket, holding investments for over one year could potentially reduce their capital gains tax rate to 20%. Keep in mind that some high earners may be subject to an additional 3.8% net investment income tax regardless of when they sell for a profit.
3. Consider tax-loss harvesting.
Tax-loss harvesting allows you to sell investments that are down and use those capital losses (meaning you sold for less than the purchase price) to offset the realized capital gains generated by other investments. Remaining net losses can be used to offset ordinary income generally up to $3,000 and unused losses thereafter can be carried forward to future years.
If you use a tax-loss harvesting strategy, be careful about any other investments you buy in the 30 days before or after you sell an investment at a loss. If the investments are deemed "substantially identical," the IRS may consider them a "wash-sale," meaning you won't be able to write off the loss. Tax-loss harvesting can be complicated to implement, so consider discussing with a financial professional.
Related: Tax-Loss Harvesting Tool
Other things to keep in mind about capital gains taxes
Capital gains taxes are not automatically deducted from your profit. Any capital gains or losses you make in a tax year are usually reported by your brokerage on Form 1099-B.
Most states also collect tax on capital gains. Some states tax capital gains at their income tax rate; other states tax long-term capital gains at less than their ordinary income rate or offer deductions or credits; and others don't collect tax on capital gains at all. Consult a tax advisor to better understand your state and local capital gains tax rates.