What are capital gains?

The point of investing is to potentially grow your wealth through buying and selling assets. If all goes according to plan and you sell an asset for more than you paid, that’s considered a capital gain. Keep reading to get a better understanding of what capital gains are, how they work (especially with taxes), and why they matter.

What are capital gains?

Realized capital gains are profits you earn when you sell an investment for more than what you initially paid. These investments can include:

• Stocks
• Bonds
• Exchange-traded funds (ETFs)
• Mutual funds
• Real estate
• Cryptocurrency
• Collectibles, such as antiques, artwork, coins, gems, metals (e.g. gold, silver, and platinum bullion), stamps, and even alcoholic beverages.

Capital gains tax typically applies only to profits made from selling investments (realized gains), not potential profits when an asset’s value rises but you don’t sell it (unrealized gains).

What are capital losses?

Capital losses occur when you sell an asset for less than you originally paid. As with capital gains, capital losses are unrealized until you execute a sale. If you have realized capital losses in a given tax year, you might be able to use them to offset realized capital gains. The strategy of selling securities at a loss for the purpose of offsetting capital gains is called tax-loss harvesting. To ensure your portfolios’ asset allocation remains aligned with your goals, you can replace the securities you sell at a loss with a similar but not substantially identical security. This will ensure that you do not violate the wash sale rule. Implementing tax-loss harvesting could potentially reduce your tax liability, either by reducing your net capital gain or offsetting up to $3,000 of ordinary income, if you have a net realized loss for the year. Any unused losses can be carried over to future years.

How do capital gains work?

Let’s say you purchase a share of stock for $50 and sell it for $75. You’ve realized a capital gain of $25. If you decide instead to hold onto the stock that’s now worth $75, that $25 gain would be considered unrealized and you wouldn’t owe taxes on it. Generally, you’ll owe federal income taxes on the $25 profit, though they are exceptions. Those could include making the sale from a tax-advantaged account, such as a 401(k), health savings account (HSA), or individual retirement account (IRA). Separately, it’s possible to qualify for a 0% capital gains tax rate.

Types of capital gains

There are 2 basic types of capital gains: short-term and long-term. The difference between them has to do with how long you’ve held the asset.

Short-term capital gains

Short-term capital gains are profits realized after selling an asset you owned for 12 months or less. These are generally treated like other sources of income as far as taxes are concerned and will be taxed at your marginal ordinary income tax rate.

Long-term capital gains

Long-term capital gains are profits realized after owning an asset for more than a year. These are generally taxed at a lower rate than short-term capital gains.

How are capital gains taxed?

At the federal level, capital gains are taxed depending on the asset type, your income, your tax-filing status, and whether they are short-term versus long-term capital gains.

Short-term capital gains tax

Short-term capital gains are generally taxed at your federal ordinary income tax rate. That can range from 10% to 37%, depending on your income and filing status.

2026 short-term capital gains tax rates based on taxable income

_{Source: Internal Revenue Service}

Long-term capital gains tax

Long-term capital gains tax rates are generally more favorable than short-term capital gains tax rates, ranging from 0% to 20% for many investments.

2026 long-term capital gains tax rates based on taxable income

Tax rate	Single filers	Married filing jointly	Married filing separately	Head of household
0%	Up to $49,450	Up to $98,900	Up to $49,450	Up to $66,200
15%	Over $49,450 to $545,500	Over $98,900 to $613,700	Over $49,450 to $306,850	Over $66,200 to $579,600
20%	Over $545,500	Over $613,700	Over $306,850	Over $579,600

_{Source: Internal Revenue Service}

Single filers with a modified adjusted gross income (MAGI) above $200,000 (or $250,000 for married couples filing jointly) may be required to pay net investment income tax (NIIT). This is an additional 3.8% tax charged on top of the federal capital gains tax and also applies to other types of investment income.

Capital gains tax for a primary residence

Home sale capital gains tax is handled a little differently. If you generate capital gains from selling your primary residence, the home you live in most of the year, you may be able to exclude gains up to $250,000 (or $500,000 if you’re married filing jointly). To qualify, the home must have been your primary residence for at least 2 of the 5 years immediately preceding the sale. Other exceptions and rules apply.

Capital gains tax for other assets

Some assets’ long-term capital gains may be taxed more than 20% at the federal level. These assets include:

• Qualified small business stock (section 1202): Maximum rate of 28%
• Collectibles: Maximum rate of 28%
• Unrecaptured section 1250 depreciated real estate (like certain commercial and rental properties): Maximum rate of 25%

Consider connecting with a tax professional to better understand your tax liability for your assets.

Why do capital gains matter?

Realizing capital gains is one of the primary ways to earn a profit from investing. A portfolio that doesn’t generate capital gains at one point or another isn’t generating a return for the investor—unless they’re earning stock dividends, bond interest, rent payments, or other passive income. Understanding your capital gains can help you fine-tune your investment and tax-reducing strategy and assess whether your portfolio is supporting your financial goals.