What are capital gains?
Capital gains are the profit you make when you sell an asset — such as a stock, fund, or real estate — for more than you paid. The IRS taxes that profit as either short-term (asset held one year or less, taxed at ordinary income rates) or long-term (held more than a year, taxed at generally lower rates). How much you owe depends on your holding period, your taxable income, and your filing status.
Depending on your taxable income, a long-term gain is taxed at 0%, 15%, or 20%.
That difference is worth knowing before you sell. Here is how capital gains work, what you would owe in 2026, and the common ways investors manage the tax.
How capital gains work
A capital gain happens when you sell an asset for more than you paid. It applies to stocks, funds, bonds, real estate, and collectibles like art or jewelry.
For example, buy a stock at $100 and sell it at $250 and you have a $150 capital gain. Hold it a year or less and it is a short-term gain, taxed as ordinary income.
Hold it more than a year and it becomes a long-term gain, taxed at 0%, 15%, or 20%. A few assets work differently: collectibles can be taxed up to 28%, and the depreciation portion of a real estate gain up to 25%.
Long-term capital gains tax rates (2026 tax year)
Assets held more than one year are taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income and filing status:
| Rate | Single | 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% | $49,451 – $545,500 | $98,901 – $613,700 | $49,451 – $306,850 | $66,201 – $579,600 |
| 20% | Over $545,500 | Over $613,700 | Over $306,850 | Over $579,600 |
Source: IRS Revenue Procedure 2025-32 (2026 tax year). Thresholds are adjusted annually.
A simplified example: sell a stock you held 14 months at a $10,000 profit, and if your income puts you in the 15% long-term bracket, the tax is about $1,500. Your actual rate depends on your income and filing status, and higher earners may owe an additional 3.8% net investment income tax — which starts at $200,000 of modified adjusted gross income for single filers and $250,000 for joint filers.
How are short-term capital gains taxed?
There is no separate short-term rate. A gain on an asset held one year or less is added to your income and taxed like wages, at rates from 10% to 37% depending on your taxable income and filing status. Current thresholds are on the IRS federal income tax rates and brackets page.
Can capital losses offset capital gains?
Realized losses can offset realized gains. If you sell one holding at a $25 gain and another at a $25 loss in the same year, they cancel out and you are taxed only on the net gain. Investors who do this deliberately call it tax-loss harvesting.
If losses exceed gains, you can deduct up to $3,000 against other income each year ($1,500 if married filing separately) and carry the rest forward to future years. Losses on personal-use property do not qualify.
How can you reduce capital gains tax?
You can’t make a taxable gain disappear, but there are well-established ways to manage the tax you owe. These are general educational examples, not recommendations — your situation determines what applies.
- Holding longer than a year. Selling after more than a year of ownership shifts a gain from short-term (ordinary income rates) to long-term (generally lower rates).
- Offsetting gains with losses. Realized capital losses can offset realized capital gains — a practice often called tax-loss harvesting. The IRS wash-sale rule disallows the loss if you buy a substantially identical security within 30 days before or after the sale, so timing matters.
- Tax-advantaged accounts. Selling investments inside a traditional IRA or Roth IRA generally doesn’t trigger capital gains tax on the sale. Those accounts follow their own tax rules, unlike a standard taxable brokerage account.
- The timing of a sale. Your rate depends on your taxable income, so realizing a gain in a lower-income year — or spreading sales across more than one tax year — can change what you owe.
M1 does not provide tax advice; Consult a qualified tax professional about the best options for your specific situation. To go deeper, see how qualified dividends are taxed.
The M1 bottom line
Capital gains tax turns on two things you control: how long you hold an asset and when you sell it. Knowing which bracket a sale falls into, and whether a loss elsewhere could offset it, is what makes the difference at tax time. Rules and thresholds change most years, so confirm the current figures before you act on them.
Frequently asked questions about capital gains tax
Capital gains tax is the tax you may owe on the profit from selling an asset — such as a stock, fund, or property — for more than you paid. The rate depends on how long you held the asset and your taxable income.
A short-term capital gain comes from selling an asset held one year or less, and is taxed at ordinary income rates. A long-term capital gain comes from an asset held more than a year, and is taxed at the generally lower long-term rates (0%, 15%, or 20%). Rates and thresholds are set by the IRS and change annually.
Long-term capital gains are taxed at 0%, 15%, or 20% depending on taxable income and filing status; short-term gains are taxed at your ordinary income rate (10%–37%). See the table above, and confirm current figures at IRS.gov.
Generally no — capital gains tax applies to realized gains, meaning gains from an asset you’ve actually sold. An investment that has risen in value but that you still hold is an unrealized gain and is generally not taxed until you sell. An exception to this is that mutual funds pass through capital gains to shareholders even if the fund shares themselves are not sold.
Common educational approaches include holding assets longer than a year for the lower long-term rate, offsetting gains with realized losses (tax-loss harvesting, subject to the wash-sale rule), and using tax-advantaged accounts. Whether any of these fits depends on your situation. Consult a qualified tax professional about the best options for your specific situation.
Investing involves risk, including the possible loss of principal. This content is educational and is not personalized investment, tax, or legal advice. M1 does not provide tax advice; consult a qualified professional about your situation. Tax figures and rules referenced are set by the IRS and change periodically — verify current figures at IRS.gov. Brokerage products and IRAs are offered by M1 Finance LLC, member FINRA/SIPC.
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