Capital Gains Tax Explained: Rates, Rules, and Strategies

What Are Capital Gains?

A capital gain is the profit from selling an asset for more than you paid for it. Capital gains apply to stocks, bonds, real estate, cryptocurrency, collectibles, and other capital assets.

Short-Term vs Long-Term

Short-Term Capital Gains

Assets held for one year or less. Taxed at your ordinary income tax rate (10-37%).

Long-Term Capital Gains

Assets held for more than one year. Taxed at preferential rates:

An additional 3.8% Net Investment Income Tax (NIIT) applies to investment income when modified AGI exceeds $200,000 (single) or $250,000 (joint).

Calculating Your Gain

Capital gain = Sale price - Cost basis - Selling expenses

Cost basis includes: purchase price, commissions, and fees. For inherited assets, the basis is stepped up to fair market value at the date of death.

Key Exclusions and Exemptions

Primary Residence Exclusion

Exclude up to $250,000 (single) or $500,000 (married) of gain from selling your primary residence if you owned and lived in it for at least 2 of the last 5 years.

1031 Like-Kind Exchange

Defer capital gains on investment property by exchanging for similar property. No limit on the amount deferred.

Tax Reduction Strategies

Hold assets for over one year to qualify for lower long-term rates

Tax-loss harvest to offset gains with losses

Donate appreciated assets to charity to avoid capital gains entirely

Use the 0% bracket if your income is low enough

Invest in Qualified Opportunity Zones for deferral and potential exclusion

Maximize your primary residence exclusion before selling

Taxation.ai automatically calculates capital gains across all your investments, identifies tax-loss harvesting opportunities, and optimizes your portfolio for tax efficiency.