An LLC itself usually does not pay capital gains tax. Because “LLC” is a legal structure and not a tax classification, the IRS taxes the business according to the election it made, and the vast majority of LLCs are pass-through entities whose capital gains flow to the members and are taxed on their personal returns at individual capital gains rates. The one exception is an LLC that elected to be taxed as a C-corporation, which pays tax on its gains at the entity level at the 21% corporate rate.1Internal Revenue Service. Limited Liability Company (LLC) Figuring out which bucket your LLC sits in is the first move; everything else follows from that.
Who Pays: It Depends on Your Tax Election
A single-member LLC is a disregarded entity by default. Its activity, including capital gains, shows up directly on the owner’s Form 1040.2Internal Revenue Service. Single Member Limited Liability Companies
A multi-member LLC is taxed as a partnership by default. It files Form 1065, but that return is informational; the partnership pays no federal income tax. Gains are allocated to members on Schedule K-1, and each member reports their share on their own return.3Internal Revenue Service. Partnerships4Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
An LLC that elects S-corporation status is also a pass-through. Capital gains flow to the shareholders and land on their personal returns just as with a partnership. The main S-corp differences (reasonable salary, payroll tax on wages, distributions above salary not subject to payroll tax) don’t change how capital gains are taxed.
An LLC that files Form 8832 to elect C-corporation treatment is the one situation where the entity itself pays capital gains tax.5Internal Revenue Service. About Form 8832, Entity Classification Election The C-corp pays 21% on the gain, and if the after-tax proceeds are then distributed to members as dividends, the members pay a second layer of tax on the dividend. That’s the double-taxation pattern that comes with the C-corp election.
2026 Capital Gains Rates for LLC Members
For pass-through LLCs, the members’ individual rates control. Short-term gains, on assets held one year or less, are taxed at ordinary income rates up to 37% in 2026. Long-term gains, on assets held longer than a year, are taxed at 0%, 15%, or 20% depending on taxable income and filing status.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The 2026 long-term brackets:7Internal Revenue Service. Revenue Procedure 2025-32
- Single: 0% up to $49,450; 15% from $49,451 to $545,500; 20% above $545,500
- Married filing jointly: 0% up to $98,900; 15% from $98,901 to $613,700; 20% above $613,700
- Head of household: 0% up to $66,200; 15% from $66,201 to $579,600; 20% above $579,600
- Married filing separately: 0% up to $49,450; 15% from $49,451 to $306,850; 20% above $306,850
Higher-income members also owe the 3.8% Net Investment Income Tax on top of these rates, which pushes the true ceiling on long-term gains to 23.8%. More on that below.
When Your LLC Sells an Asset
For a pass-through LLC, the gain is calculated at the entity level and then allocated to members according to the operating agreement. Whether the gain is long-term or short-term is measured at the LLC level: the entity must have held the asset for more than a year for the preferential rate to apply.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses Members pick up their share from the K-1 and report it on Form 8949 and Schedule D.8Internal Revenue Service. About Schedule D (Form 1040)
Depreciation Recapture on Business Property
Selling equipment, machinery, or a commercial building isn’t a clean capital gain. Sections 1245 and 1250 of the Internal Revenue Code require depreciation recapture, which converts part of the gain back into ordinary income up to the amount of depreciation previously claimed.9Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property The rule prevents an owner from taking ordinary deductions for depreciation and then paying a lower capital gains rate on the reversal.
For tangible personal property under Section 1245, the entire depreciation amount is recaptured as ordinary income. For depreciable real property, the “unrecaptured Section 1250 gain” is taxed at a maximum rate of 25% rather than the member’s ordinary rate.10Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed The recaptured portion is reported on Form 4797, and any remaining gain typically qualifies as Section 1231 gain, which is treated as long-term capital gain.11Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property
Capital Gains Escape Self-Employment Tax
Here’s a break active LLC members often miss. Capital gains from selling assets are generally excluded from self-employment tax under IRC Section 1402(a)(3).12Internal Revenue Service. Self-Employment Tax and Partners Even a member who pays 15.3% self-employment tax on their share of operating income avoids that tax on a capital gain. The carve-out doesn’t cover inventory or property held primarily for sale to customers; that revenue is ordinary business income and is subject to SE tax.
When You Sell Your Membership Interest
Selling your ownership stake in an LLC is a separate transaction from the LLC selling its own assets. Under IRC Section 741, the sale of a partnership interest produces capital gain or loss.13Office of the Law Revision Counsel. 26 USC 741 – Recognition and Character of Gain or Loss on Sale or Exchange Gain equals sale proceeds minus your adjusted tax basis. Hold the interest more than a year and the long-term rates apply. Report the transaction on Form 8949 and Schedule D.
The “Hot Assets” Rule Under Section 751
Section 751 stops members from converting what would have been ordinary income into a lower-taxed capital gain by wrapping it inside an interest sale. The statute reaches “unrealized receivables” and “inventory items,” informally called hot assets.14Office of the Law Revision Counsel. 26 U.S. Code 751 – Unrealized Receivables and Inventory Items
When you sell, you must figure out how much of the sale price is attributable to those hot assets. That portion is taxed as ordinary income regardless of your holding period. On a $100,000 gain where $30,000 is tied to unrealized receivables, only $70,000 gets capital gains treatment; the $30,000 is ordinary. Making this calculation requires information from the LLC on the fair market value and adjusted basis of those assets. A sale that triggers Section 751(a) also triggers a reporting obligation for the LLC: Form 8308, filed with the IRS with copies to the buyer and seller.15Internal Revenue Service. Instructions for Form 8308 The selling member attaches a statement to their return detailing the ordinary income piece.
Basis: Where Most Gain Calculations Go Wrong
Every capital gain calculation starts with basis, and members who lose track of it either overpay or underreport. Initial basis is your cash contribution plus the adjusted basis of any property you contributed. It moves every year:
- Up for your share of the LLC’s taxable income, tax-exempt income, and any additional contributions
- Down for your share of losses and deductions, and for distributions you receive
The K-1 gives you the annual figures, but the running total is your responsibility. One trap in particular: once basis reaches zero, any further cash distribution is immediately taxable as a capital gain. A $10,000 distribution to a member with $2,000 of basis left creates an $8,000 taxable gain with no sale involved.
How LLC Debt Changes Your Basis
Partnership taxation has a feature C-corp and S-corp treatment lacks: your share of the LLC’s liabilities increases your basis. Higher basis lets you absorb more losses and take more tax-free distributions before triggering gain.
Recourse liabilities, where a specific member bears the economic risk of loss (often through a personal guarantee), are allocated to that member. Nonrecourse liabilities, where the lender can look only to the collateral, are shared among members based on their LLC interests. When your share of debt decreases, whether the LLC paid down the loan or your allocation shifted, the reduction is treated as a deemed distribution. If it exceeds your remaining basis, it produces a capital gain.
Ways to Defer or Reduce the Gain
Section 1031 Like-Kind Exchanges
Section 1031 lets an LLC swap real property held for business use or investment for other like-kind real property and defer the gain until the replacement property is sold in a taxable transaction.16Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Timing is strict: identify the replacement property within 45 days and close within 180 days.
Two limits matter. Since 2017, Section 1031 covers only real property; equipment, vehicles, and inventory no longer qualify. And partnership interests are explicitly excluded, so a member cannot 1031-exchange their membership interest.17Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 When individual members want their own 1031 treatment, the LLC usually has to either distribute the property before the exchange or complete the exchange at the entity level and distribute interests in the replacement property after. Both approaches carry tax risk and want careful planning.
Installment Sales
If the LLC sells property and receives at least one payment after the year of sale, the sale can qualify for installment reporting. The gain is spread across the years payments come in rather than recognized all at once.18Internal Revenue Service. Publication 537 (2025), Installment Sales Each payment splits into three parts: return of basis (not taxed), capital gain, and interest income.
Installment reporting is automatic for qualifying sales unless the seller opts out. It’s not available for inventory, dealer dispositions, or publicly traded securities. The LLC reports on Form 6252, and each member’s share flows through on the K-1.19Internal Revenue Service. About Form 6252, Installment Sale Income For a large sale, spreading the gain can keep members out of the 20% bracket.
Section 1202 (C-Corporation LLCs Only)
An LLC that elected C-corporation treatment may qualify its shareholders for the Section 1202 exclusion on qualified small business stock. For stock issued after July 4, 2025, a shareholder may exclude 100% of the gain, up to the greater of $15 million or ten times the shareholder’s adjusted basis in the stock.20Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock The corporation must have aggregate gross assets of $75 million or less at issuance, at least 80% of assets must be used in a qualified trade or business, and several industries are excluded (consulting, financial services, health care, restaurants, real estate, among others). The stock must be held at least three years. Section 1202 doesn’t apply to pass-through LLCs.
The 3.8% Net Investment Income Tax
The Net Investment Income Tax adds 3.8% to the capital gains bill for higher-income members. It kicks in when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.21Internal Revenue Service. Net Investment Income Tax These thresholds are not indexed for inflation.
The tax applies to the lesser of net investment income or the amount by which MAGI exceeds the threshold.22Internal Revenue Service. Questions and Answers on the Net Investment Income Tax A passive LLC member whose income is above the threshold will see nearly all of their capital gains from the LLC swept in. Members who materially participate may be able to keep some operating income out of the NIIT calculation, but capital gains from selling assets or a membership interest are generally included whether the member is active or not.