Understanding how capital gains tax works is essential for anyone investing, selling property, or managing a long‑term wealth strategy — especially as tax laws continue to evolve.
With shifting brackets and ongoing policy changes, now is the time to take a closer look at how capital gains taxes affect your financial picture and strategies to minimize capital gains.
In this article, we break down the key concepts, current tax rates, and practical planning opportunities to help you make informed decisions and keep more of your investment returns working for you.
How the capital gains tax works
When you sell a capital asset, like stocks, bonds, or real estate, you may make a profit. This profit comes from the increase in value since you bought the asset or received it as a gift or inheritance. The IRS considers the profit capital gain income, which may be taxable.
How long you’ve owned the asset, where you live, your modified adjusted gross income (MAGI), and other factors can impact your capital gains. High-income earners may also face a 3.8% net investment income tax (NIIT) on top of capital gains taxes.
The Net Investment Income Tax (NIIT) thresholds for 2026 are fixed by statute and are not adjusted for inflation, remaining the same as previous years. The 3.8% tax applies to the lesser of your net investment income or the amount your Modified Adjusted Gross Income (MAGI) exceeds the following thresholds:
| Your Filing Status | Threshold Amount |
| Married filing jointly | $250,000 |
| Qualifying widow(er) with dependent child | $250,000 |
| Single | $200,000 |
| Head of household | $200,000 |
| Married filing separately | $125,000 |
NOTE: There are active business exclusions from NIIT that should be reviewed prior to return filing.
Also see NIIT exclusion mentioned later for gains on sale of primary residence.
Taxable capital assets
Here are some common types of capital assets that may be taxed. This applies to both personal and business use. Certain tax-deferred accounts that do not incur capital gains tax include 401(k) plans, IRAs, 529 education savings plans, and health savings accounts (HSAs).
- Investments: stocks, bonds, mutual funds, ETFs, cryptocurrencies, and NFTs
- Property: real estate, automobiles, and business equipment
- Collectibles: art, antiques, coin or stamp collections, and precious metals
- Household items: jewelry and furnishings
Capital gains tax rates for 2026
Short-term capital gains tax rate
Short-term capital gains apply to assets held for one year or less. They are taxed at the individual’s ordinary income tax rate.1
| Tax rate | Single | Head of household | Married filing jointly or qualifying widow | Married filing separately |
| 10% | $0 to $12,400 | $0 to $17,700 | $0 to $24,800 | $0 to $12,400 |
| 12% | $12,401 to $50,400 | $17,701 to $67,450 | $24,801 to $100,800 | $12,401 to $50,400 |
| 22% | $50,401 to $105,700 | $67,451 to $105,700 | $100,801 to $211,400 | $50,401 to $105,700 |
| 24% | $105,701 to $201,775 | $105,701 to $201,750 | $211,401 to $403,550 | $105,701 to $201,775 |
| 32% | $201,776 to $256,225 | $201,751 to $256,200 | $403,551 to $512,450 | $201,776 to $256,225 |
| 35% | $256,226 to $640,600 | $256,201 to $640,600 | $512,451 to $768,700 | $256,226 to $384,350 |
| 37% | $640,601 or more | $640,601 or more | $768,701 or more | $384,351 or more |
Long-term capital gains tax rate
Long-term capital gains taxes apply if you’ve held the assets for more than a year. Tax laws typically favor assets held long-term to incentivize taxpayers to stay invested.
For 2026, these are the federal long-term capital gains tax rates:1
| Tax rate | Single | Head of household | Married filing jointly or qualifying widow | Married filing separately |
| 0% | $0 to $49,450 | $0 to $66,200 | $0 to $98,900 | $0 to $49,450 |
| 15% | $49,451 to $545,500 | $66,201 to $579,600 | $98,901 to $613,700 | $49,451 to $306,850 |
| 20% | $545,501 or more | $579,601 or more | $613,701 or more | $306,851 or more |
NOTE: Capital assets received by gift receive both the carryover basis and holding period from the donor, except in cases when the property fair market value (FMV) is less than the donor’s adjusted basis at the time of the gift.
Capital assets received by inheritance generally receive a stepped-up basis to the fair market value as of the date of death and an automatic long-term holding period.
State capital gains tax
Some states do not have a separate capital gains tax. Other states can have rates from 0% to over 14%. These rates are in addition to federal taxes.
California has the highest state capital gains tax rate, up to 12.3%; New York and New Jersey follow closely behind with maximum rates of 10.9% and 10.75%, respectively. On the other hand, North Dakota has a state capital gains rate of 2.5%. States with no capital gains tax include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
NOTE: The 2025 tax law bill, commonly referred to as OBBBA, potentially allows increased amounts for itemizing tax deductions which include sales and use tax, property tax, personal property tax, and state income taxes. The potential 2025 maximum of $40,000 (up from $10,000) is applicable to most taxpayers with Adjusted Gross Income (AGI) of less than $500,000 ($250,000 for married filing separately) with increases to the cap and AGI thresholds of 1% annually from 2026 to 2029.
Principal residence capital gains exclusion
When selling your primary residence, you can exclude up to $250,000 of gain ($500,000 for joint filers) from your income. This exclusion, which is available every two years, is not subject to the NIIT. However, any gain above these limits, or from selling secondary residences or vacation homes, is subject to the NIIT.
Capital gain tax strategies for investors
There are several ways to reduce capital gain taxes. These depend on your personal situation and current tax laws. We’ll share a couple of common ones that demonstrate how to reduce capital gains tax.
Tax-loss harvesting is one way. When you sell stocks that have lost value, and your losses are more than your gains, you can deduct up to $3,000. If you do not use all your losses, they are carried over indefinitely to future years. You can also use these losses to reduce your ordinary taxable income from other sources.
Many taxpayers are also considering investments in long-short strategies which promote the generation of capital losses to help offset current and future capital gain events.
Be mindful of the wash-sale rule which prevents an investor from tax loss harvesting if the same security is purchased within 30 days of the trade that created the loss.
Another strategy to consider is contributing appreciated long-term investments to a donor-advised fund (DAF) or directly to charity. In addition to supporting a cause you care about by donating to a charity, you can also avoid capital gains tax.
You can also claim a tax deduction for the fair-market value of your donation. This is usually up to 30% of your AGI when donating securities. If you have any unusable charity donation amounts, they carryover for up to five additional years. Though carryovers to 2026 and after will be subject to new OBBBA limitations on AGI and tax bracket use.
Planning and next steps
This article does not cover every detail about capital gains taxes. However, it shows how important capital gains are in tax planning, estate planning, gifts, and investment strategies. For example, there are additional capital gains tax laws related to rental properties and inherited assets. Moreover, calculating capital gains taxes isn’t always so straight-forward.
The main takeaway here should be that our ever-changing and complex tax laws, as well as each family’s personal situation, need to be evaluated for effective wealth management.
If you’d like tax planning and investment management as part of a comprehensive wealth management solution, Mercer Advisors can help! We also integrate financial planning, estate planning, and insurance solutions into your plan. Ready for Mercer Advisors to help amplify and simplify your financial life? Let’s talk.
1 “Don’t forget the tax man: The 2026 capital gains tax rates.” MSN.com, Dec. 26, 2025.
2 “2025 Capital Gains Tax Rates by State.” SmartAsset, Dec. 3, 2025.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio.
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