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Capital gains and dividend taxes
· Law or rule
Fact, law or dataA rule, statute, definition or measured number.
Federal tax on profits from selling assets and on dividends, with lower rates for assets held more than a year.
See it on the Money & Finance map →How it works
A gain is taxed only when realized, usually when you sell. Assets held over a year get long-term rates of 0%, 15% or 20%, depending on income; short-term gains are taxed as ordinary income, up to 37%. Qualified dividends get the long-term rates. High earners add the 3.8% net investment income tax. Losses offset gains plus $3,000 of other income a year. Buildings face up to 25% on depreciation recapture, 1031 exchanges defer gains, and heirs get a 'step-up' in basis.
Why it matters
Holding past one year, timing sales and harvesting losses can be worth as much as picking investments, so taxes belong in any decision to buy, sell or move money.
Facts, rules and data
Internal Revenue Code sections 1(h), 1211, 1411 and 1031; IRS Form 8949 and Schedule D; and the IRS's yearly inflation adjustments to the rate brackets.
Debates and risks
Economists disagree whether low rates spur investment or mainly favor the wealthy; proposals to tax unrealized gains or end the step-up at death keep returning.
Connections (3)
▸Dividends and stock buybacks are taxed under Capital gains and dividend taxesFact, law or data
The connection
Qualified dividends, from US and many foreign companies held long enough, are taxed at the long-term capital gains rates of 0%, 15% or 20%. Buybacks raise the share price instead, so holders pay only when they sell, usually at those same rates, which lets them defer the tax.
When and why
The 2003 tax law first taxed qualified dividends at capital-gains rates; since 2023 companies also pay a 1% excise tax on buybacks.
How we know
Internal Revenue Code sections 1(h)(11) and 4501; IRS Form 1099-DIV reports qualified dividends separately.
Debates and risks
Whether the tax edge of buybacks over dividends distorts corporate payout decisions, and whether the buyback tax should rise, is debated.
▸Internal Revenue Service (IRS) collects Capital gains and dividend taxesFact, law or data
The connection
When an asset sells for more than its cost basis, the gain goes on Form 8949 and Schedule D; brokers send the IRS matching 1099-B forms, and 1099-DIV for dividends. Gains on assets held over a year are taxed at 0%, 15% or 20%, plus a 3.8% surtax on high earners; real estate depreciation recapture is taxed up to 25%.
When and why
Nationwide; gains have been taxed since 1913, broker cost-basis reporting phased in from 2011, and crypto broker reporting began with 2025 sales.
How we know
The Internal Revenue Code (Sections 1(h), 1250 and 1411) sets the rates; IRS Statistics of Income data show realized gains by year.
Debates and risks
Whether lower capital gains rates boost investment or mainly benefit the wealthy is debated, as is the 'stepped-up basis' that erases unrealized gains at death.
▸Seller financing: the seller carries back a note can defer, via installment-sale rules, Capital gains and dividend taxesFact, law or data
The connection
Under installment-sale rules, a seller carrying a note reports gain as principal is collected, not all at once. If gain is 60% of the price, 60% of each principal payment is taxable when received. Recapture on equipment and cost-segregated parts is still taxed in the sale year, and notes over $5 million can owe extra interest on the deferred tax.
When and why
In US federal tax law, Internal Revenue Code Section 453, used by property sellers nationwide; California generally follows it for state tax.
How we know
IRC Sections 453 and 453A, IRS Publication 537, and Form 6252, which sellers file for each year they collect payments.
Debates and risks
Whether deferral pays depends on future tax rates and the buyer's credit; if the buyer defaults, repossession has its own tax rules.