Capital Gains and Losses Under US Federal Tax Rules
By SimplyCPA · 11 October 2026
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- Capital asset: Almost any property held for personal or investment use — but not inventory, receivables, or depreciable property and land used in a business (those are Section 1231).
- Holding period: More than one year is long-term; one year or less is short-term and taxed at ordinary rates.
- Rates: Long-term gains and qualified dividends are taxed at 0%, 15% or 20%; collectibles at up to 28%; unrecaptured Section 1250 gain at up to 25%; plus the 3.8% net investment income tax at higher incomes.
- Losses: Individuals deduct net capital losses up to $3,000 a year ($1,500 married filing separately) and carry the rest forward indefinitely.
- Basis rules: Inherited property gets a fair market value basis at death and is always long-term; gifted property generally keeps the donor's basis.
What is a capital asset?
Section 1221 defines a capital asset as all property held by the taxpayer, except:
- inventory and property held primarily for sale to customers;
- depreciable property and real property used in a trade or business (Section 1231 property);
- accounts and notes receivable acquired in the business;
- copyrights and creative works held by the person who created them;
- certain supplies used in the business.
Shares, bonds, a personal residence, a personal car and investment land are all capital assets. Losses on personal-use assets are not deductible.
The netting process
- Net short-term gains and losses together.
- Net long-term gains and losses together (within rate groups: 28%, 25%, 0/15/20%).
- If one result is a gain and the other a loss, net them against each other.
- A net capital loss is deductible against ordinary income up to $3,000 ($1,500 MFS); the excess carries forward indefinitely, keeping its short- or long-term character.
Example: Short-term gain $4,000; short-term loss $9,000; long-term gain $2,000.
Net short-term = $5,000 loss. Net long-term = $2,000 gain. Overall = $3,000 net short-term loss → fully deductible this year against ordinary income. Nothing carries forward.
Rates for long-term gains
Long-term capital gains and qualified dividends are taxed at 0%, 15% or 20%, depending on taxable income. For 2025, the 0% rate applied to taxable income up to $48,350 for single filers ($96,700 joint), and the 20% rate began at $533,400 ($600,050 joint); these thresholds are adjusted for inflation each year in the IRS revenue procedure. Special categories:
- Collectibles (art, coins, precious metals) — up to 28%.
- Unrecaptured Section 1250 gain (depreciation on real estate) — up to 25%.
- Net investment income tax — an extra 3.8% if modified AGI exceeds $200,000 single or $250,000 joint (not indexed).
Basis rules worth memorising
| How acquired | Basis | Holding period |
|---|---|---|
| Purchase | Cost plus acquisition costs | From the day after purchase |
| Inheritance | Fair market value at date of death (or alternate valuation date) | Always long-term |
| Gift | Donor's basis (carryover). If the property's value at the time of the gift was below the donor's basis, use that lower value for measuring a loss ("dual basis") | Tacks onto the donor's period when carryover basis is used |
Wash sales
A loss on selling shares is disallowed if substantially identical shares are bought within 30 days before or after the sale. The disallowed loss is added to the basis of the new shares, and the holding period carries over.
Selling your home (Section 121)
Up to $250,000 of gain ($500,000 for joint filers) is excluded if the taxpayer owned and used the home as a main residence for at least two of the five years before the sale. The exclusion can generally be used once every two years.
Corporations are different
C corporations have no preferential capital gains rate (everything is taxed at 21%), may deduct capital losses only against capital gains, and carry net capital losses back three years and forward five.
Continue with like-kind exchanges and property transactions and our REG notes on gains, losses and like-kind exchanges.