How do I handle capital gains taxes on my investments?

You owe capital gains tax when you sell an investment for more than you paid, in a regular (taxable) brokerage account. Inside 401(k)s and IRAs, trades are not taxed when they happen. Managing capital gains is mostly about timing, account choice and record keeping.

Short-term vs long-term

• Short-term gains (assets held one year or less) are taxed as ordinary income, at your regular bracket, up to 37%.
• Long-term gains (held more than one year) get lower rates: 0%, 15% or 20%.

For the 2026 tax year, the 0% rate applies to taxable income up to about $49,450 for single filers and $98,900 for married couples filing jointly. The 20% rate starts around $545,500 (single) and $613,700 (joint). Most people pay 15%. High earners may also owe the 3.8% net investment income tax above $200,000 (single) or $250,000 (joint) of modified AGI. Thresholds change each year; the IRS topic on capital gains and losses has the official figures.

Other investment income

• Qualified dividends (most dividends from US companies held long enough) are taxed at the long-term capital gains rates. Ordinary dividends and bond interest are taxed as regular income.
• Mutual fund distributions: funds can pass capital gains to you even if you did not sell any shares.
• Municipal bond interest is generally free of federal tax.
• Treasury interest is free of state income tax.

Your broker sends Form 1099-B, 1099-DIV and 1099-INT each year.

Ways to reduce what you owe

1. Hold for more than a year when it makes sense. Waiting a few weeks to cross the one-year line can cut the rate substantially.
2. Use tax-advantaged accounts first (account types).
3. Tax-loss harvesting: sell investments at a loss to offset gains. Net losses can offset up to $3,000 of ordinary income a year, with the rest carried forward.
4. Respect the wash-sale rule: if you buy the same or a “substantially identical” security within 30 days before or after selling at a loss, the loss is disallowed for now. This includes purchases in your IRA.
5. Choose lots carefully. When selling part of a position, picking specific high-cost lots (instead of first-in, first-out) can reduce the gain.
6. Place investments wisely: keep tax-inefficient holdings (bond funds, REITs, active funds) in tax-advantaged accounts.
7. Use low-income years to realize gains at the 0% rate.
8. Donate appreciated shares to charity instead of cash, and consider the step-up in basis heirs receive.

Keep records

Your broker tracks cost basis for most securities bought after 2011, but check it, especially for transferred accounts, inherited shares and reinvested dividends. When rebalancing, prefer new contributions over selling winners. For large or complex situations (stock options, a business, real estate), a CPA or enrolled agent is worth consulting. This article is general information, not tax advice.