Capital gains do count as income for federal tax purposes. Every dollar of profit from selling a stock, a piece of real estate, or another asset gets folded into your gross income and shows up on your tax return. What makes them different from a paycheck is the rate structure: profits on assets you held longer than a year usually qualify for rates well below the brackets that apply to wages. The trade-off is that those gains still flow through your adjusted gross income, and that number governs a long list of deductions, credits, surcharges, and premium calculations that many people don’t think about until the bill arrives.
Short-Term and Long-Term Gains Are Taxed Differently
The holding period is the single biggest variable. Assets held for one year or less produce short-term capital gains, which are taxed at the same rates as your wages, anywhere from 10% to 37% depending on your bracket.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses There is no special treatment. The IRS stacks the gain on top of your other income and taxes it at your marginal rate.
Assets held for more than one year produce long-term capital gains, taxed at 0%, 15%, or 20%.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses Which rate applies depends on your total taxable income and filing status. For 2026:2Tax Foundation. 2026 Tax Brackets
- The 0% rate applies to taxable income up to $49,450 for single filers, $98,900 for married filing jointly, and $66,200 for head of household.
- The 15% rate covers taxable income from those thresholds up to $545,500 single, $613,700 joint, and $579,600 head of household.
- The 20% rate applies above the 15% ceiling.
The rate is not applied to the gain in isolation. It depends on where the gain lands after being added to the rest of your taxable income. If your ordinary income already sits at $540,000 and you add a $20,000 long-term gain, part of that gain crosses into the 20% bracket even though most of it falls in the 15% zone.
Two Categories of Long-Term Gains Face Higher Rates
Not every long-term gain fits the 0/15/20% structure. Profits from selling collectibles such as coins, art, stamps, antiques, and precious metals are taxed at a maximum rate of 28%.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses If your ordinary long-term rate would be lower, you pay the lower rate. If your income puts you in the 20% bracket, the collectibles portion still gets 28%.
Gains attributable to depreciation previously claimed on real estate face a maximum rate of 25%, sometimes called unrecaptured Section 1250 gain.1Internal Revenue Service. Topic No. 409, Capital Gains and Losses If you owned a rental and deducted depreciation over the years, the IRS effectively claws those deductions back at 25% when you sell. Profit beyond the depreciation portion is taxed at the standard long-term rates.
Capital Gains Push Up Your AGI
Even when long-term gains qualify for the preferential rates, they still get added to your adjusted gross income. AGI is the gatekeeper for dozens of deductions, credits, and phase-outs, and a spike from a gain can push you past thresholds you would otherwise clear.
Medical expenses are only deductible above 7.5% of AGI, so a higher AGI raises the floor and can wipe out the deduction. Income-sensitive credits like the Child Tax Credit begin phasing out at set AGI levels. Direct Roth IRA contributions depend on modified adjusted gross income; for 2026, contributions phase out between $153,000 and $168,000 for single filers and between $242,000 and $252,000 for married couples filing jointly. A single large sale can push you past those limits in a year you didn’t expect.
MAGI also drives eligibility for premium tax credits under the Affordable Care Act.3HealthCare.gov. What’s Included as Income A capital gain that raises your MAGI can shrink or eliminate a Marketplace subsidy for the year.
The 3.8% Net Investment Income Tax
Higher-income taxpayers face an additional 3.8% surtax on net investment income, capital gains included. This Net Investment Income Tax kicks in when MAGI exceeds $200,000 for single filers or $250,000 for married couples filing jointly.4Internal Revenue Service. Topic No. 559, Net Investment Income Tax The tax applies to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.
These thresholds are not indexed to inflation, so more people cross them each year. Take a married couple with $260,000 in MAGI, $30,000 of which is a long-term gain. The 3.8% surtax applies to $10,000, the amount above the $250,000 threshold, adding $380 on top of the regular capital gains tax. For someone with substantial investment income well above the line, the NIIT effectively raises the top long-term rate from 20% to 23.8%.
Medicare Premiums Can Rise Two Years Later
Gains can also drive up your Medicare premiums through the Income-Related Monthly Adjustment Amount, or IRMAA. Medicare uses your MAGI from two years prior to set Part B and Part D premiums, so a large gain in one year triggers higher premiums two years down the road.5Social Security Administration. Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event
For individuals, surcharges begin when MAGI exceeds $109,000, or $218,000 for married couples filing jointly. At the lowest tier the extra monthly cost is roughly $81 for Part B and $15 for Part D. At the top tier, MAGI above $500,000 for individuals or $750,000 for couples, the combined monthly surcharge exceeds $570.5Social Security Administration. Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event Over a year that is close to $7,000 in extra premiums, an amount few people factor in before selling.
If the gain was a one-time event like selling a business or property, you can file SSA Form 44 to ask Social Security to use a different year’s income, but only if you had a qualifying life-changing event such as retirement, a work reduction, or the death of a spouse.
Losses Reduce What Counts as Income
You do not pay tax on every winning trade in isolation. At year-end you combine all your capital transactions through netting. Each transaction is reported on Form 8949 (or directly on Schedule D if your broker reported basis and no adjustments are needed), and the totals flow to Schedule D of your Form 1040.6Internal Revenue Service. Instructions for Form 8949
Netting runs in steps. Short-term gains offset short-term losses to produce a net short-term figure. Long-term gains offset long-term losses the same way. If one category shows a net gain and the other a net loss, you combine them. A net long-term gain after all that gets the preferential rates. A net short-term gain gets ordinary rates.
If you finish the year with an overall net capital loss, you can deduct up to $3,000 of it against ordinary income, or $1,500 if you are married filing separately.7Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses Anything beyond that carries forward until fully used.8Office of the Law Revision Counsel. 26 USC 1212 – Capital Loss Carrybacks and Carryovers A long-term loss carried forward stays long-term; a short-term loss stays short-term.
You May Owe Estimated Tax During the Year
Wages have taxes withheld automatically. Capital gains from selling investments generally do not. If you realize a large gain during the year, you may need to make estimated tax payments to avoid an underpayment penalty. The IRS expects quarterly payments if you will owe $1,000 or more after subtracting withholding and credits, unless your withholding will cover at least 90% of the current year’s tax or 100% of the prior year’s tax (110% if prior-year AGI exceeded $150,000).9Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.
This catches people. You sell a rental in June, spend some of the proceeds, and then find out in April that you owe not just the tax but a penalty for not paying it during the year. If the gain lands mid-year, the annualized income installment method on Schedule AI of Form 2210 lets you match estimated payments to the quarter the income actually arrived. If you have a W-2 job, raising your withholding for the remaining pay periods works too: the IRS treats withheld wages as paid evenly across the year no matter when the withholding actually happened.9Internal Revenue Service. Large Gains, Lump Sum Distributions, Etc.
State Taxes Add to the Federal Bill
Federal treatment is only part of the picture. Most states tax capital gains as ordinary income. State rates run from zero in about nine states with no income tax to over 13% at the top end. A few states offer partial exclusions or lower rates for certain gains, and at least one state taxes only gains above a specific dollar threshold. Combined federal, state, and NIIT liability on a long-term gain can approach 37% or more for high-income taxpayers in the highest-tax states. Before a major sale, the state layer deserves the same attention as the federal one.