Capital Gains Tax Guide

Anytime you sell an asset for a profit, that profit is subject to a type of tax known as capital gains tax. Understanding how and why these taxes are assessed can help you make better decisions about which assets to sell and when, and can ultimately save you a substantial amount on your tax bill.

Key Takeaways

• Profits realized from the sale of an asset are known as capital gains, while losses are referred to as capital losses.
• These types of profits are divided into short-term gains for assets owned for a year or less and long-term gains for assets owned for over a year.
• Short-term gains are typically taxed at the filer’s normal income tax rate, while long-term gains are taxed at a lower rate based upon the individual’s total taxable income.
• Taking advantage of exemptions and smart investing strategies can help significantly reduce your capital gains tax obligations.

What are capital gains?

Capital gains are profits generated when an asset is sold. This can include anything from vehicles and personal belongings to real estate holdings, stocks and government bonds. As time goes by, many of these types of assets appreciate in value. When the asset’s owner sells them, the profit gained above its initial value is known as capital gains.

When an asset is sold for less than the purchase price or its determined valuation, that is referred to as a capital loss. At the end of a given year, the difference between an individual’s capital gains and capital losses is known as their net capital gains or net capital losses, depending on whether they have gained or lost value overall between all the sales of their capital assets for that year.

It’s important to note that capital gains themselves are distinct from capital gains taxes. While some assets are not subject to capital gains tax, just about all assets that appreciate in value do accrue capital gains. Depending on the type of assets, how they are managed and where the owner lives, those gains may be subject to capital gains taxes.

What are capital gains taxes?

Capital gains taxes are taxes assessed on some or all of the profits realized by the sale of assets. The rate at which this income is taxed varies based on how long the owner has possessed the sold assets, the taxpayer’s total taxable income, and what sorts of assets they are. Depending on these factors, an individual’s capital gains tax rate can range anywhere from 0% to 20% or, in some cases, higher for certain assets.

What are short-term capital gains?

Capital gains are loosely categorized as either short-term or long-term, depending on how long the owner has possessed the asset. Generally speaking, if an individual has owned the asset for a year or less, it qualifies as a short-term gain.

Short-term capital gains are taxed as ordinary income and are subject to the same income tax rate the individual pays on the rest of their earnings for the year.

What are long-term capital gains?

Long-term capital gains are profits realized on assets the owner has possessed for more than one year. These profits are typically subject to a lower tax rate than short-term gains, with the specific rate primarily determined by the individual or household’s total taxable income.

Capital gains tax rates in 2026

For the 2026 tax year, the long-term capital gains tax rate is 0% for:

• Individuals with less than $48,350 in taxable income
• Married couples filing jointly with less than $96,700 in taxable income
• Heads of households making less than $64,750  in taxable income

The long-term capital gains tax rate in 2026 is 15% for:

• Individuals making more than $48,350 but less than $533,400 in taxable income
• Married couples filing separately with more than $48,350 but less than $300,000 each in taxable income
• Married couples filing jointly making more than $96,700 but less than $600,050 in taxable income
• Heads of households making more than $64,750 but less than $566,700 in taxable income

Individuals or couples whose taxable income for the year exceeds these limits are assessed a 20% tax rate on long-term capital gains.

As is always the case, the short-term capital gains realized on sales of assets owned for a year or less are subject to whatever the individual or couple’s regular income tax rate is based on their taxable income.

Tips for reducing capital gains tax

While the tax liabilities for capital gains can be substantial in certain cases, there are a few ways to reduce capital gains taxes or avoid them entirely.

One easy way to circumvent capital gains taxes on your investments is to include tax-exempt retirement accounts in your portfolio, like Roth 401(k) or Roth IRA accounts. These types of accounts are not subject to capital gains taxes, and offer a host of other benefits to investors planning ahead for retirement.

You may also net capital losses against capital gains in the same tax year.  Tax-loss harvesting as its called.  We generally look for losses near year end to offset any gains.  You may also deduct up to $3000 each year for net capital losses, further adding tax value to your situation.

There are other ways to reduce your capital gains tax obligations on other types of accounts, too. One of the best ways to reduce your tax burden is to only sell assets you’ve possessed for more than a year, qualifying them for the long-term capital gains tax rate instead of your normal income tax rate. No matter what your income level, this rate will almost always be lower than your standard income tax rate and can lead to huge savings at tax time.

Another popular strategy for reducing capital gains tax costs is waiting until your income level is relatively low compared to other years and selling your assets in that window. If, for instance, you’re recently retired but have not started taking the required minimum distributions from your retirement accounts, your taxable income may dip below the threshold for either the 15% or even the 0% capital gains tax rate for your household. Selling your assets while your taxable income is low will keep your tax burden low compared to selling late in your career or further into your retirement.

Bottom Line

Capital gains taxes can seem like a major financial burden during tax season, but a well-managed investment portfolio and long-term planning can help reduce your liabilities many times over. By selling assets at the right time and understanding what your obligations will be well in advance, you can be prepared to make the most of your investments and make the right decisions for your individual situation.

Horizons Wealth Management can help you determine the best way to build your financial future through financial advising, managed portfolio services and wealth management.

Capital Gains Tax FAQ