Capital Gains and Losses

When you sell an investment or other capital asset for more or less than your cost, the difference is a capital gain or loss. How long you held the asset and your overall income decide the tax rate. Understanding the basics helps you plan sales, harvest losses and avoid surprises on Form 1099-B. This guide uses the official 2025 and 2026 thresholds and explains how to report the results.

How gains and losses are figured

Gain or loss is the sale price minus your adjusted basis. Basis is generally what you paid, including commissions, plus the cost of improvements, minus certain adjustments such as depreciation. The holding period starts the day after you acquire the asset and includes the day you sell it. More than one year makes a gain long-term.

Special basis rules apply to property you did not buy:

• Inherited property generally takes a basis equal to its fair market value when the owner died, and is treated as long-term.
• Gifted property generally keeps the giver's basis, so you may owe tax on the giver's gain.
• Stock splits, reinvested dividends and mutual fund distributions change your basis. Keep brokerage statements. See how long to keep tax records.

You first combine short-term gains and losses, then long-term, then net the two. A net short-term gain is taxed as ordinary income. A net long-term gain gets the lower rates.

Long-term capital gains rates

The 0%, 15% and 20% rates depend on your taxable income, including the gain. These are the official thresholds.

Above the 15% threshold, the rate is 20%. Qualified dividends use the same rates. Some gains have different maximum rates: net gains on collectibles such as art and coins are taxed at up to 28%, unrecaptured gain on depreciated real property is taxed at up to 25%, and the taxable part of qualified small business stock gain is taxed at up to 28%. See qualified small business stock.

Example 1: A single filer has $40,000 of ordinary taxable income and a $10,000 long-term gain in 2025. The 0% rate applies up to $48,350 of total taxable income, so $8,350 of the gain is taxed at 0% and the remaining $1,650 at 15%, for $247.50 of tax on the gain.

Capital losses

If losses exceed gains, you can deduct up to $3,000 against other income ($1,500 if married filing separately). The remainder carries forward to future years until used. Losses on personal-use property, such as a car or your home, are not deductible.

Example 2: An investor has an $8,000 net capital loss and no gains in 2025. She deducts $3,000 against wages and carries forward $5,000 to 2026.

The wash sale rule

You cannot deduct a loss on stock or securities if, within 30 days before or after the sale, you buy substantially identical stock or securities, get a contract or option to buy them, or acquire them in an IRA or Roth IRA. The disallowed loss is added to the basis of the new shares, so it is deferred, not erased. Buying in a spouse's account can also trigger the rule. Tax-loss harvesting is useful, but timing matters.

Net investment income tax

Individuals with higher income may owe an additional 3.8% tax on investment income, including capital gains. The thresholds are fixed at $200,000 for single filers and $250,000 for joint filers. See net investment income tax.

Reporting

Report most sales on Form 8949, which lists each transaction, then summarize on Schedule D (Form 1040). Brokers send Form 1099-B with proceeds and, for most securities, cost basis. Digital assets are reported differently. See cryptocurrency taxes. Home sales have their own exclusion rules in home sale exclusion. If you owe tax on a gain, you may need to make estimated payments.

Illinois and other states

Illinois taxes capital gains as part of net income at the flat Illinois rate of 4.95%, with no separate lower rate for long-term gains. Because Illinois starts from federal adjusted gross income, a gain you report federally also generally appears in Illinois. Other states may offer exclusions or taxes. See our Illinois guide.

How we can help

We review your year-to-date gains and losses, identify wash sale and basis problems, plan the timing of sales, and prepare Form 8949 and Schedule D. See tax planning and our page for investors and crypto, or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.