Two clients can earn the same pretax return and keep very different amounts. Four things decide the gap: how long the asset was held, which account held it, its basis and when it was sold.
A capital gain is the profit from selling a capital asset, such as a stock or fund share, for more than its basis (roughly, its cost). Under Internal Revenue Code (IRC) 1222, an asset held more than one year produces a long-term gain. An asset held one year or less produces a short-term gain.
The label sets the rate. Short-term gains are taxed as ordinary income, at rates up to 37%. Long-term gains are taxed at 0%, 15% or 20% under IRC 1(h). In 2026 the 0% rate applies to taxable income up to $49,450 single and $98,900 joint. The 20% rate applies above $545,500 single and $613,700 joint, and 15% applies in between. These breakpoints test total taxable income, not just the gain. Long-term gains stack on top of ordinary income, so ordinary income fills the 0% band first.
Common mistakes
- Netting out of order: Applying the $3,000 cap before netting misstates the deduction. So does carrying a long-term loss forward as short-term.
- Top-bracket thinking: The $80,000 single filer owes $12,312, not 22% × $80,000 = $17,600. Use the marginal rate only for the next dollar, a deduction or a TEY.
- Stale retirement figures: Age 72 for RMDs and the old 50% penalty are gone. Use 73 or 75, and 25% (10% if corrected).
Bottom line
- Long-term gains (held more than one year) and qualified dividends are taxed at 0%, 15% or 20%, and short-term gains are taxed as ordinary income.
- In 2026 the 0% rate runs to $49,450 single and $98,900 joint taxable income, and 20% starts above $545,500 single and $613,700 joint.
- Net gains and losses within each holding group, then across, and deduct up to $3,000 of net loss a year, carrying the rest forward indefinitely.
- The 3.8% NIIT applies above $200,000 single and $250,000 joint MAGI, and those thresholds are not indexed.
Exam shortcut
Sort before you compute. First ask where the asset sits. Money coming out of an IRA or plan is ordinary income, so dividend and gain labels stop mattering. Next, label each sale short-term or long-term, net within groups, then across, and only then apply the $3,000 limit. Stack long-term gains on top of ordinary income before picking 0%, 15% or 20%.
The full lesson (about 4,379 words, 29 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C23
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