Capital Gains Tax Basics

When you sell an investment for more than you paid, the profit is a capital gain — and how long you held the asset largely determines how it is taxed.

Short-term vs long-term

• Short-term gains (assets held one year or less) are taxed at your ordinary income tax rates.
• Long-term gains (held more than one year) get preferential rates — 0%, 15%, or 20% depending on your taxable income.

Holding an investment just past the one-year mark can meaningfully change the tax bill on a sale.

Cost basis matters

Your gain is the sale price minus your cost basis — generally what you paid, including reinvested dividends. Keeping good basis records (or confirming your custodian's records) prevents overpaying tax when you sell.

Offsetting gains with losses

Capital losses offset capital gains dollar for dollar. If losses exceed gains, up to $3,000 per year can offset ordinary income, and the remainder carries forward to future years. This is the mechanism behind tax-loss harvesting.

The net investment income tax

Higher-income households may owe an additional 3.8% net investment income tax (NIIT) on top of capital gains rates once modified adjusted gross income crosses the statutory thresholds.

Special situations

• Primary residence: up to $250,000 of gain ($500,000 married filing jointly) may be excluded if ownership and use tests are met.
• Inherited assets: basis generally "steps up" to the value at the owner's death.
• Gifted assets: the recipient usually takes the giver's original basis.

Key takeaways

• Holding period drives the rate: over one year unlocks preferential treatment.
• Losses are valuable — they offset gains and a slice of ordinary income.
• Basis records and timing of sales are where planning adds value.

This article is for educational purposes only and is not tax advice. Consult your tax professional about your specific situation.