Personal Finance & Estate › Income, gift, estate & real-estate taxes › Income tax (federal & California)
Capital gains tax (short- vs. long-term)
0 / 15 / 20% federal· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
Tax on profit when you sell an investment: lower rates if held over a year, ordinary rates if a year or less.
See it on the Personal Finance & Estate map →How it works
Gain is the sale price minus your basis (cost plus improvements, minus depreciation). Assets held over one year are long-term, taxed federally at 0%, 15% or 20%; 20% applies above roughly $600,000 of joint taxable income. Short-term gains are taxed as ordinary income, up to 37%. Losses offset gains plus $3,000 a year of other income, with the rest carried forward. On top: 3.8% NIIT for higher earners, and California taxes all gains as ordinary income.
Why it matters for you
Timing and holding period set the rate; for real estate and appreciated stock, the gain at sale is often the largest single tax bill a person faces.
Rules, limits and sources (2026)
The Revenue Act of 1921 created the first lower capital-gains rate; IRC Sec. 1(h) sets today's rates; IRS Rev. Proc. 2025-32 lists the 2026 thresholds.
Watch out for
Economists debate whether lower capital-gains rates boost investment or mainly benefit the wealthy; taxing gains at death keeps being proposed and rejected.
Inside this (2)
Connections (9)
▸Capital gains tax (short- vs. long-term) is a part of Income tax (federal & California)Law or rule (2026)
How they connect
Capital gains aren't a separate tax: they are part of taxable income on the same Form 1040, stacked on top of ordinary income. Long-term gains and qualified dividends then get the lower 0/15/20% rates, while short-term gains are taxed as ordinary income. Gains also raise AGI, which can trigger NIIT, IRMAA and phase-outs.
When it applies
Gains were taxed as ordinary income from 1913; the Revenue Act of 1921 introduced a separate lower rate for long-held assets.
The rule
IRC Sec. 1(h) computes the special rates inside the income tax; Form 1040's Schedule D and capital-gain tax worksheet show the mechanics.
Watch out for
Whether gains should be taxed like wages, indexed for inflation, or taxed at death keeps resurfacing in Congress.
▸Net investment income tax (3.8%) adds 3.8% on top of Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
For higher earners, the NIIT adds 3.8% on top of the regular capital-gains rate, making the top federal rate 23.8% on long-term gains and 28.8% on depreciation recapture. It hits investment income above the $200,000/$250,000 thresholds. Gains excluded under the home-sale rule or deferred in a 1031 aren't touched.
When it applies
Enacted in the March 2010 health-care reconciliation law to help pay for the Affordable Care Act; despite its 'Medicare contribution' name, revenue goes to the general fund. It first applied to 2013 income.
The rule
IRC Sec. 1411 and Form 8960; Treasury regulations (2013) define gains from property as net investment income.
Watch out for
Whether the NIIT should extend to high earners' active business income, as proposed in 2021, remains a live debate.
▸Home-sale exclusion ($250k / $500k, Sec. 121) exempts home profits from Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
A home sale is a capital transaction, so its gain would normally be taxed. Section 121 removes up to $250,000 ($500,000 joint) of that gain, and the excluded amount also escapes NIIT. Gain above the cap is taxed as capital gain, and post-1997 depreciation at up to 25%. Losses on a home aren't deductible.
When it applies
The 1997 Taxpayer Relief Act replaced the old rollover rule and the one-time $125,000 exclusion for sellers 55 and older.
The rule
IRC Sec. 121 and IRS Publication 523; sales are reported on Form 8949 when gain exceeds the exclusion or a Form 1099-S is issued.
Watch out for
Because the caps aren't indexed, more long-time owners exceed them each year; whether Congress will raise them is open.
▸Charitable remainder trust (CRT) defers and spreads Capital gains tax (short- vs. long-term)Depends on you
How they connect
You give an appreciated building or stock to a CRT, which is tax-exempt, so it can sell without paying capital-gains tax up front. You receive a yearly payout, 5–50% of value, for life or up to 20 years, and the gain is taxed gradually as payouts come out. Charity gets what's left; heirs don't.
When it applies
Created by the Tax Reform Act of 1969; widely used for appreciated real estate and stock since the 1980s.
How sure?
IRC Sec. 664 and its four-tier ordering rules; IRS Form 5227 and trust K-1s track gain as it is distributed.
Watch out for
Whether a CRT beats simply selling depends on age, rates and charitable intent; mortgaged property complicates it. Ask your CPA.
▸Tax-loss harvesting & the wash-sale rule offsets Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
Harvested losses net against realized gains: short-term against short-term, long-term against long-term, then across. A net loss can offset up to $3,000 of other income a year, with the rest carried forward, so losses banked now can shelter a later large gain.
When it applies
Applies on every taxable investor's yearly Schedule D; California follows the same $3,000 limit and carryforward.
The rule
IRC Secs. 1211 and 1212; IRS Form 8949 and Schedule D; California Schedule D.
Watch out for
Unused carryforwards expire at death, so whether banked losses are ever fully used varies by family.
▸Depreciation & recapture (27.5 / 39 years) adds an up-to-25% layer to Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
When you sell, the part of the gain that came from depreciation, 'unrecaptured Section 1250 gain', is taxed at your ordinary rate but no more than 25%, while the rest gets 0/15/20%. For high earners that's 28.8% with NIIT on recapture versus 23.8% on appreciation, plus California's 13.3% on all of it.
When it applies
Congress set the 25% maximum rate for real-estate depreciation in the 1997 Taxpayer Relief Act.
The rule
IRC Sec. 1(h)(1)(E) and 1(h)(6); the 'Unrecaptured Section 1250 Gain Worksheet' in the Schedule D instructions.
Watch out for
Planners debate whether depreciation's yearly savings outweigh later recapture; for owners who hold until death, the step-up usually settles it.
▸California income tax (top rate 13.3%) gives no discount to Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
California has no lower capital-gains rate: long- and short-term gains are taxed like wages, up to 13.3%. So a top-bracket Californian's combined rate on long-term gains reaches about 37.1% (20% + 3.8% + 13.3%). California also taxes nonresidents on gains from California real estate, so moving away doesn't avoid it.
When it applies
California ended its partial capital-gains exclusion in 1987, conforming to the 1986 federal reform, and never restored a preference.
The rule
FTB Schedule D (540) instructions treat gains as ordinary income; FTB Form 593 handles withholding on California real-estate sales.
Watch out for
Proposals for a California capital-gains break, or for a wealth tax on billionaires, surface regularly; whether high taxes drive investors away is debated.
▸Rebalancing can trigger Capital gains tax (short- vs. long-term)Standard practice
How they connect
Rebalancing means selling what has grown and buying what lagged. In a taxable account, selling winners realizes gains, short-term if held a year or less. To limit tax, rebalance inside IRAs and 401(k)s, steer new cash and dividends to underweight holdings, harvest losses, or give appreciated shares to charity.
When it applies
An issue for anyone with a taxable brokerage account, most acute after strong markets like 2023–25 that inflate stock weights.
How sure?
IRC Sec. 1001 taxes realized gains; Vanguard and Morningstar research quantifies the tax drag of rebalancing in taxable accounts.
Watch out for
How often to rebalance, by calendar or drift bands, and when tax costs outweigh risk control, is debated among researchers.
▸Refinancing & cash-out refinance taps equity without triggering Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
Borrowing isn't income, so a cash-out refinance pulls equity from an appreciated property with no capital-gains or recapture tax. Owners can 'buy, borrow, die': hold, refinance for cash, and let heirs get a step-up in basis at death, erasing the gain. The catch: more debt and interest, and the full gain is still taxed if the property is sold instead.
When it applies
A long-standing practice among real-estate owners; tax law has treated loan proceeds as non-income since the early income tax.
The rule
Long-settled law treats borrowed money as non-income because it must be repaid; Commissioner v. Tufts (1983) shows the debt counts at sale instead.
Watch out for
Refinancing just before or after a 1031 exchange can be challenged as taking taxable cash; how close is too close remains unsettled.