Capital Gains Tax on Stocks: Short-Term vs Long-Term Rates Explained  

What Are Capital Gains on Stocks?

Have you sold stocks, real estate, collectibles, or an asset for a profit over this past tax year? If so, it’s important to understand capital gains taxes. In general, taxpayers owe capital gains tax on stocks when they’ve sold a stock for a profit and earned a realized gain.

Capital gains are profits earned when you sell an asset for more than its original purchase price. When a taxpayer does this, they may owe capital gains tax on the investment income rather than on earned income.

How will you know if capital gains taxes apply to your stock sale? First, you need to know if your gains are realized or unrealized. Realized gains occur when you sell the stock and physically receive the profit. Unrealized gains reflect increases in a stock’s value that haven’t been taxed yet because the asset hasn’t been sold. Stock gains move from unrealized to realized when the stock is sold.

Next, you need to calculate your stock's cost basis. The cost basis is defined as the original purchase price of the stock plus any fees, transfer costs, or commissions. Then, you’ll compare this cost basis to the price for which you ultimately sold the stock. If the cost basis is lower than the sale price, then you earned a profit and owe capital gains taxes on that profit.

Source: IRS Pub. 550

Next Step: If you purchase stock or sell assets, you need to understand capital gains tax laws to remain compliant when reporting and paying taxes. Download our First-Time Investor Tax Guide to learn everything you need to know.

Now that you understand what capital gains are, the next step is determining how long you held the stock, since timing plays a major role in how those gains are taxed.

Short-Term vs Long-Term Capital Gains: Holding Periods Explained

Why Holding Periods Matter for Taxes

How long you hold a stock position before selling it can significantly affect the amount of tax you owe. The IRS applies different tax rates depending on whether your investment is considered short-term or long-term, and the difference can be substantial. Understanding holding periods helps you plan sales more strategically and avoid paying more tax than necessary.

Understanding that you owe capital gains taxes on your realized gains is only one step of the process when reporting and paying your taxes.

Next, you need to determine what type of tax rate is going to apply based on the holding period of your stock. A capital gains holding period is the period a taxpayer owns an asset. Short-term capital gains tax applies when you hold a stock for one year or less before selling it. The IRS measures holding periods in days, not tax years. Long-term capital gains tax rates apply when the taxpayer has owned the investment stock for more than a year.

To calculate your holding period, start on the date you acquired the asset and count the days until the day you sell it. Depending on your financial needs, you can develop capital gains tax strategies that provide the most favorable tax treatment.

For beginners, it might seem like splitting hairs to identify all your short-term capital gains from your long-term capital gains, but there are no shortcuts when it comes to accurately and effectively reporting your taxes. It’s critical that you attribute the proper tax rate to the right capital gains to remain compliant with the IRS.

Source: IRS Pub. 550, Capital Gains and Losses

Next Step: As you review your stock investments and determine their holding periods, consider creating a spreadsheet to track your investments and a checklist to ensure you take the right steps when filing. For some guidance, you can check out our downloadable stock sale tax checklist. Keeping all your documents together in one place will simplify your filing process.

Once you’ve identified whether your gains are short-term or long-term, you also need to understand how those gains fit into your overall income picture.

How Holding Period Is Calculated

The IRS measures holding period in days, not in tax years.

• The acquisition date is excluded from the count
• The sale date is included
• To qualify for long-term treatment, you must hold the asset for more than one year — meaning you sell at least 366 days after acquiring it (or 367 in a leap year)

Common mistake: Selling exactly one year after purchase. That's 365 days — still short-term. Wait at least one more day to lock in long-term rates.

Special holding period rules apply to:

• Inherited stock — automatically long-term, regardless of how long you've held it after inheritance
• Gifted stock — you inherit the donor's holding period (carryover)
• RSUs — holding period starts on the vesting date, not the grant date
• ISO exercises — different holding rules apply for AMT vs ordinary tax purposes

How Capital Gains Are Taxed With Your Other Income

For tax purposes, you need to add up the value of all your realized capital gains and separate them based on each stock’s holding period. This is because your capital gains interact with your other income in a layered, additive way. First, you’ll add on the short-term capital gains and calculate your tax bracket. For tax calculation purposes, long-term capital gains are stacked on top of your ordinary income, but they are taxed at separate preferential rates.

The short-term capital gains investment income total will be taxed in the same way as your ordinary income, so this total should be directly added to your other wages.

Once you’ve calculated your total ordinary income with your short-term capital gains, you can estimate what ordinary income tax rate you fall into. This bracket will determine how your long-term capital gains investment income is taxed. As an overall rule, the higher your ordinary income is, the higher your long-term capital gains tax rate will be. You can check out the next section to identify exactly what tax rate you’ll get charged based on your income for your 2025 return.

Source: IRS Instructions for Schedule D

Next Step: Are you currently calculating your overall capital gains from your stock sales? If so, then you’ll need to fully understand each stock’s cost basis first. Check out our cost basis guide for more information.

With your total income in mind, you can now determine which long-term capital gains tax rate applies based on your filing status and income level.

Long-Term Capital Gains Tax Brackets for 2026

If you’ve held your stock for more than a year and long-term capital gains tax rates apply, then you will use the following rates based on your total taxable income and filing status for 2026:

Source: IRS Rev. Proc. 2025-32

Understanding these capital gains tax brackets and rates is crucial to ensuring you apply the appropriate tax rate to your investment income.

Next Step: Once you have a solid understanding of what you’ll owe, you can begin working on reporting your stock sales. Find out exactly what forms and procedures you need to follow by checking our reporting stock sales page now.

For higher-income taxpayers, long-term capital gains rates may not be the final step—an additional investment tax can apply in certain situations.

Net Investment Income Tax (NIIT): Who Owes the Extra 3.8%

Did you earn a substantial income over the past year? If so, then the net investment income tax rate might apply to your situation. The net investment income tax is an additional 3.8% tax on investment income.

To determine if this might apply to you, you first need to calculate your modified adjusted gross income (MAGI). This amount is determined by calculating your adjusted gross income and adding back any foreign earned income exclusion or foreign housing exclusion you utilized to calculate your original AGI.

From there, you need to determine your filing status. If your MAGI amount exceeds the following thresholds, then you will be required to apply the net investment income tax:

• Married Filing Jointly/Qualifying Widow: $250,000
• Married Filing Separately: $125,000
• Single/Head of Household: $200,000

If your income exceeds those thresholds, your next step is to determine your net investment income. Compare this figure to your MAGI. You’ll pay the 3.8% NIIT on the lesser of your net investment income or the amount your MAGI exceeds the threshold. If the MAGI overage is less than your investment income, then you’ll pay a 3.8% tax rate on the amount your MAGI exceeds the threshold.

NIIT example:

Sarah is single with MAGI of 235,000. She has 50,000 of net investment income (capital gains, dividends, interest).

• MAGI threshold: $200,000
• MAGI overage: 235,000 − 200,000 = $35,000
• Net investment income: $50,000

NIIT applies to the lesser of net investment income (50,000) or MAGI overage (35,000) = $35,000

NIIT owed: 35,000 × 3.8% = 1,330

Sarah owes $1,330 of NIIT on top of her regular capital gains tax.

What NIIT does NOT apply to:

• Wages and self-employment income (those are subject to the Additional Medicare Tax instead)
• Distributions from qualified retirement plans (401(k), traditional IRA, Roth IRA)
• Income from a business in which you actively participate (non-passive)
• Tax-exempt municipal bond interest
• Gain from the sale of a primary residence within Section 121 limits

Source: IRS, Net Investment Income Tax

Next Steps: Before moving forward, consider whether you may owe state taxes on your investment income. Check out our state taxes page for more details.

How Capital Losses Work

Not every sale produces a gain. When you sell stock for less than your cost basis, you have a capital loss. Losses follow specific tax rules under the Internal Revenue Code:

Step 1: Losses offset gains in the same category first

• Short-term losses first offset short-term gains
• Long-term losses first offset long-term gains
• Then any remaining loss in one category offsets gains in the other

Step 2: $3,000 ordinary income offset

If your total capital losses exceed your total capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if Married Filing Separately). This includes wages, interest, and other taxable income.

Step 3: Unused losses carry forward indefinitely

Losses you can't use in the current year carry forward to future years and retain their original short-term or long-term character. There is no expiration date — unused losses stay on your books until used.

Strategic implication: This is the foundation of tax-loss harvesting, where investors intentionally realize losses to offset gains and reduce taxable income. Be aware of wash sale rules that can disallow a loss if you repurchase substantially identical securities within 30 days.

Accurately Reporting and Paying Your Capital Gains Tax on Stocks

Understanding your capital gains tax liability helps you accurately report your taxes and pay what you owe. What’s more, it can help guide your investment strategies in future years, too, so that you can maximize your tax situation.

Ultimately, tax compliance should be a priority for you. If you’ve made stock sales over the past year, then it might be a good idea to download our Stock Sale Tax Checklist to help you identify all your taxable sales.

This article is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws and dollar thresholds referenced are current as of the last reviewed date shown above and may change. For guidance on your specific situation, consult a qualified tax professional.