The federal tax code splits capital gains into two regimes by holding period. Short-term gains — assets held one year or less — are added to ordinary income and taxed at the same marginal rates that apply to wages and interest. Long-term gains — assets held more than one year — qualify for the preferential 0%, 15%, or 20% brackets, plus the 3.8% Net Investment Income Tax surtax for higher earners.
The gap between the two regimes is one of the largest single planning levers in the personal tax code: a top-bracket short-term gain is taxed at 37% + 3.8% NIIT = 40.8%, while the same gain held one extra day past the one-year mark drops to 20% + 3.8% NIIT = 23.8% — a 17-percentage-point difference, or $170,000 saved on a $1 million gain.
For full bracket details and 2026 worked examples, see the Capital Gains Tax Calculator. For the wash sale rule that affects the holding-period clock, see the Wash Sale Calculator.
1. The 2026 federal capital gains brackets
Long-term capital gains (and qualified dividends)
| Filing status | 0% bracket | 15% bracket | 20% bracket |
|---|---|---|---|
| Single | Up to $48,350 | $48,351 – $533,400 | Above $533,400 |
| Married Filing Jointly | Up to $96,700 | $96,701 – $600,050 | Above $600,050 |
| Head of Household | Up to $64,750 | $64,751 – $566,700 | Above $566,700 |
| Married Filing Separately | Up to $48,350 | $48,351 – $300,025 | Above $300,025 |
The “income” used to determine the bracket is taxable income — gross income minus the standard or itemized deduction, plus any above-the-line adjustments. Long-term gains and qualified dividends are then stacked on top of ordinary income.
Short-term capital gains (ordinary income brackets)
Short-term gains are taxed at the same marginal rates as ordinary income:
| Filing status | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
|---|---|---|---|---|---|---|---|
| Single | ≤$11,925 | ≤$48,475 | ≤$103,350 | ≤$197,300 | ≤$250,525 | ≤$626,350 | >$626,350 |
| MFJ | ≤$23,850 | ≤$96,950 | ≤$206,700 | ≤$394,600 | ≤$501,050 | ≤$751,600 | >$751,600 |
| HoH | ≤$17,000 | ≤$64,850 | ≤$103,350 | ≤$197,300 | ≤$250,500 | ≤$626,350 | >$626,350 |
NIIT — the 3.8% surtax that affects both
The Net Investment Income Tax adds 3.8% on the lesser of net investment income or the excess of Modified AGI over the threshold:
| Filing status | NIIT threshold |
|---|---|
| Single | $200,000 |
| MFJ | $250,000 |
| MFS | $125,000 |
| HoH | $200,000 |
NIIT applies to short-term and long-term gains. Combined top marginal rates:
- Short-term + NIIT: 37% + 3.8% = 40.8%
- Long-term + NIIT: 20% + 3.8% = 23.8%
2. The holding period — “more than one year”
The threshold is one year plus one day, measured from the day after the purchase date through the sale date. The IRS specifically excludes the purchase day from the count:
- Purchase: 15 January 2025
- Day 1: 16 January 2025
- Day 365: 15 January 2026 (still short-term — exactly one year)
- Day 366: 16 January 2026 (first day of long-term)
A sale on 15 January 2026 is short-term. A sale on 16 January 2026 is long-term. The one-day distinction makes the difference between potentially 20% and 37% federal rates plus the 3.8% NIIT — a regular planning friction during the second January after large purchases.
Trade date governs the holding period, not settlement date. So a sale executed on 15 January with T+1 settlement on 16 January is still a 15 January sale for tax purposes.
Special holding period rules
A few common positions have non-obvious holding-period rules:
- Gifted securities. Holding period “tacks” — you inherit the donor’s purchase date. A gift of stock the donor held 10 years is automatically long-term in your hands the moment you receive it.
- Inherited securities. Automatically long-term regardless of how long the decedent held them, and the basis is stepped-up (or down) to fair market value at the date of death — see the §121 vs §1031 page for related basis-adjustment mechanics.
- Stock acquired through option exercise. ISO shares: holding period starts on the exercise date for capital-gains purposes (but ISO qualifying-disposition rules add a separate 2-year-from-grant + 1-year-from-exercise test). NSO shares: holding starts on exercise; ordinary-income compensation portion is fixed at exercise.
- RSUs. Holding period starts on the vest date (the date the shares are delivered to you), not the grant date.
- Mutual fund distributions. Reinvested dividends start their own holding-period clock from the reinvestment date.
- Wash sale. If a wash sale loss is disallowed, the disallowed loss is added to the basis of the replacement shares, and the holding period of the original shares is tacked onto the replacement. See the Wash Sale Calculator for the full mechanic.
3. Worked example: when one day matters
Maria bought 1,000 shares of an S&P 500 ETF on 1 July 2024 for $50,000. By June 2025, the shares are worth $120,000 — a $70,000 unrealized gain. She wants to take profits to fund a home renovation.
Option A: Sell on 1 July 2025 (exactly one year — short-term)
- Gain: $70,000 short-term capital gain
- Maria’s filing status: Single. 2026 taxable income before gain: $180,000 (24% bracket)
- $70,000 added at 24%, 32% steps: $70,000 stacks on top of $180,000 → portion to $197,300 ($17,300) taxed at 24%, $52,700 taxed at 32%
- Federal: ($17,300 × 24%) + ($52,700 × 32%) = $4,152 + $16,864 = $21,016
- NIIT: $50,000 of gain pushes Maria above $200,000 NIIT threshold; the $50,000 excess × 3.8% = $1,900
- Total federal: $22,916 on $70,000 gain (32.7% effective rate)
Option B: Sell on 2 July 2025 (one day past — long-term)
- Gain: $70,000 long-term capital gain
- Maria’s 2025 taxable income: $180,000 → bracket lookup for LTCG: $180,000 + $70,000 = $250,000 stacked. Single 15% bracket goes to $533,400, so all $70,000 falls in 15%.
- Federal: $70,000 × 15% = $10,500
- NIIT: $50,000 × 3.8% = $1,900
- Total federal: $12,400 on $70,000 gain (17.7% effective rate)
One-day delay saves Maria $10,516 in federal tax. State tax savings (most states tax both types as ordinary income, but several — Arkansas, Hawaii, Iowa, Montana, New Mexico, North Dakota, South Carolina, Vermont, Wisconsin — offer partial LTCG preferences) often add another $1,000-3,000 to the gap.
4. Capturing the 0% LTCG bracket
The 0% bracket is the most underused planning lever in the tax code. For 2026:
- Single: First $48,350 of taxable income — covered entirely by 0% LTCG.
- MFJ: First $96,700 of taxable income — covered entirely by 0% LTCG.
“Tax gain harvesting” is the practice of selling long-term-held appreciated positions up to the 0% bracket ceiling and immediately repurchasing the same security. Unlike tax-loss harvesting, there is no wash-sale rule on gains — the IRS does not care if you sell-and-rebuy at a gain, since the gain creates tax liability they want to collect.
The mechanic resets cost basis to the sale price, locking in higher future basis at zero federal cost. For a retiree drawing down a Traditional IRA in low-income years before RMDs begin, harvesting gains up to the 0% ceiling is essentially a free step-up.
Worked example: harvesting in the 0% bracket
Bob is single, age 64, retired with $50,000 of total income (Social Security + small pension) in 2026. His taxable income after the standard deduction ($16,550 for single age 65+ in 2026 with no above-the-line adjustments — Bob’s not yet 65 so uses regular $15,350) is roughly $34,650 — well under the $48,350 single-filer 0% LTCG ceiling.
Bob has 200 shares of XYZ acquired 3 years ago at $40/share, now worth $90/share — $10,000 of unrealized gain.
- Sell all 200 shares: $10,000 long-term gain.
- New ordinary income: still $34,650 (gain is LTCG, not ordinary).
- LTCG bracket check: $34,650 + $10,000 = $44,650 — still under $48,350.
- Federal tax on the $10,000 gain: $0.
- Immediately repurchase 200 XYZ shares at $90: new basis $18,000.
If Bob sells those shares 5 years later for $120/share, the new gain is $6,000 (= $24,000 sale − $18,000 basis) instead of $16,000 (against the original $8,000 basis). Bob saved tax on $10,000 of appreciation that would otherwise be taxed at his then-future rate.
For retirees in this window — between retirement and RMD age — tax gain harvesting is one of the highest-ROI moves available.
5. State tax — most states ignore the federal preference
The federal preference for long-term gains is one of the largest gaps between federal and state tax treatment. Most state tax systems treat all capital gains, short- and long-term alike, as ordinary income:
- No preference (taxed as ordinary): California (up to 13.3%), New York (up to 10.9% + NYC 3.876%), New Jersey (10.75%), Oregon (9.9%), and most others.
- Partial preference: Arkansas (50% exclusion on LTCG), Hawaii (4.4% reduced rate), Iowa (qualified-business preference), Montana (1% reduction), New Mexico (40% exclusion), North Dakota (40% exclusion), South Carolina (44% exclusion), Vermont (40% exclusion or $5K flat), Wisconsin (30% exclusion).
- No state tax: Alaska, Florida, Nevada, New Hampshire (interest/dividends only), South Dakota, Tennessee, Texas, Washington (but see below), Wyoming.
Washington state is a unique case: a 7% standalone capital gains excise tax on long-term gains exceeding $270,000 in 2025 (indexed to $278,000 for 2026), with a $270,000 standard deduction. Short-term gains are excluded from this tax but are still federally taxed. The Washington tax does not stack on the state’s general income tax (there is none) — it’s a free-standing levy on LTCG above the threshold.
For relocation planning around large gain events, see the State Income Tax Calculator and the multi-state guides for the highest-earner relocation paths.
6. Section 1202 QSBS — short-term gains can still qualify
A counter-example to the short-vs-long structure: §1202 Qualified Small Business Stock allows up to $10 million or 10× basis of gain to be fully excluded from federal income tax, regardless of holding period type, provided certain conditions are met:
- Stock issued by a C corporation with ≤$50M aggregate gross assets at issuance.
- Stock held more than 5 years.
- Active business test (≥80% of assets in qualified trade or business).
- Original issuance to the seller (not purchased on secondary market).
The “more than 5 years” is the qualifying holding period — well past the 1-year long-term threshold. QSBS converts what would be a long-term gain into a fully excluded gain. For founders and early employees of qualifying startups, see the QSBS Exclusion Calculator.
7. Mistakes that cost the long-term rate
- Selling on the anniversary day. Recall day 366, not day 365. Off-by-one drops you into short-term.
- Wash sale during the holding period. Selling at a loss and rebuying within 30 days resets the holding-period clock backward — though the disallowed loss is added to the basis.
- Constructive sale rules (§1259). Hedging a long position with an offsetting short can trigger a “constructive sale” and accelerate gain recognition — including converting a soon-to-be-long-term position into a short-term realization. Common in collared positions.
- Mark-to-market traders (§475(f)). Day traders who elect §475(f) treat all gains as ordinary income — no LTCG preference. This is generally bad for net winners and good for net losers.
- Forgetting state-level §475 conformity. Some states (e.g., California) decouple from §475 — federal short-term and state ordinary can diverge.