Capital Gains Tax Guide

Short-term vs long-term capital gains

The 0% capital gains bracket

This is one of the most underused tax breaks in the US tax code. If your taxable income is below $48,350 (single) or $96,700 (MFJ) in 2026, your long-term capital gains are taxed at 0%.

Strategy: in low-income years (sabbatical, job change, early retirement), realize gains while in the 0% bracket. Effectively a free step-up in cost basis.

Tax-loss harvesting

If you have stocks/ETFs/funds with unrealized losses, you can sell to realize the loss, deduct it against capital gains, and reinvest in similar (not identical) securities to maintain market exposure:

• Losses offset gains dollar-for-dollar
• Excess losses (above gains) can offset up to $3,000 of ordinary income per year
• Excess beyond that carries forward to future years indefinitely
• Wash-sale rule: cannot buy "substantially identical" security within 30 days before or after the loss sale

Primary residence exclusion ($250K / $500K)

If you sell your primary residence at a gain, you can exclude up to $250,000 ($500,000 MFJ) of gain from capital gains tax IF:

• You owned the home for at least 2 of the last 5 years
• You used it as your primary residence for at least 2 of the last 5 years
• You haven't used the exclusion on another home sale in the past 2 years

If gain exceeds the exclusion, the excess is long-term capital gain.

Section 1031 like-kind exchange (real estate only)

For investment real estate (NOT primary residence), you can defer capital gains tax indefinitely by exchanging into another like-kind property:

• Identify replacement property within 45 days of sale
• Close on replacement within 180 days
• Use a qualified intermediary to hold proceeds (you cannot touch the money)
• Replacement property must be of equal or greater value
• If you sell the replacement without another 1031, all deferred gains are recognized
• Heirs receive stepped-up basis on inherited property — gains can be permanently avoided

Frequently Asked Questions

What is the capital gains tax rate for 2026?

Long-term: 0% (income under $48,350 single / $96,700 MFJ), 15% (most middle/upper-middle), 20% (income over $533,400 single / $600,050 MFJ). Add 3.8% NIIT for income over $200K single / $250K MFJ. Short-term: same as ordinary income (10-37%).

Do I pay state capital gains tax?

Most states tax capital gains as ordinary income. 9 states have NO state income tax (and therefore no state capital gains): AK, FL, NV, NH, SD, TN, TX, WA, WY. California taxes at full state rate (up to 13.3%).

Can I avoid capital gains by holding forever?

In a sense — until you sell, no tax is owed. If you hold until death, your heirs receive a stepped-up basis (the cost basis becomes the value at your death), and prior gains are essentially erased. This is one reason why long-term holding compounds wealth.

What's the wash-sale rule?

If you sell a security at a loss and buy "substantially identical" security within 30 days before or after, the loss is disallowed. Common workaround: sell SPY at a loss, buy IVV (different fund tracking same S&P 500 index) — different ticker, similar exposure, not "substantially identical."

Are crypto gains capital gains?

Yes — for federal tax purposes, the IRS treats cryptocurrency as property. Same long-term/short-term rules. Each trade is a taxable event. Wash-sale rule does NOT currently apply to crypto (loophole some traders use), though there's pending legislation to extend it.