How capital gains are taxed

You have a gain when your amount realized from a sale or other disposition exceeds your adjusted basis for determining gain under section 1011. Your gain is the difference between those amounts. You have a loss when your adjusted basis for determining loss under that section exceeds your amount realized.

Your amount realized includes the money you receive plus the fair market value of any property other than money you receive. If you receive both money and other property, you include both components when determining your amount realized.

You must also account for the real property tax rules in section 164(d). You exclude a reimbursement for real property taxes treated under that section as imposed on the purchaser. When section 164(d) assigns real property taxes to you, the corresponding amounts count toward your amount realized if payment is the purchaser's responsibility.

You begin by distinguishing ordinary results from capital results for each gain and loss. For the capital category, you next determine whether each result belongs in the short term or long term group. If you have long term gains and losses, you must identify your 28% rate gains and losses. If you have a net capital gain, you must also identify any unrecaptured section 1250 gain.

You generally classify a capital gain or loss as long term if you held the asset for more than one year before disposing of it. For assets you dispose of after owning them for one year or less, both gains and losses generally receive short term treatment.

Under section 1222, your short term capital gain is gain from selling or exchanging a capital asset held for no more than one year. That definition applies if and to the extent you take the gain into account when calculating your gross income.

If you sell or dispose of inherited property that is a capital asset, you treat your gain or loss as long term regardless of how long you held the property.

For certain gains involving applicable partnership interests, your long term holding period is more than three years. This rule applies beginning in 2018. It is an exception to the general holding period of more than one year.

When you receive property in an exchange, you include your holding period for the exchanged property if the conditions in section 1223 are met. Your received property must have, wholly or partly, the same basis as the exchanged property for determining gain or loss under the applicable chapter. At the time of the exchange, your exchanged property must have been a capital asset under section 1221 or property described in section 1231.

For this holding period rule, you treat an involuntary conversion described in section 1033 as an exchange of the converted property for the acquired property. You also treat a distribution covered by section 355, or the portion of section 356 relating to section 355, as an exchange.

To calculate your net capital gain or loss correctly, you classify your capital gains and losses by holding period. Your net capital gain is the amount by which your net long term capital gain for the tax year exceeds your net short term capital loss for that year.

You may face a lower tax percentage on this gain than on ordinary earnings. You determine whether such a gain exists by subtracting that year's net short term capital loss from its net long term capital gain and checking for a positive remainder.

If you have a net capital gain for a tax year, section 1(h)(1) limits the tax imposed by that section to the sum of six components. The calculation uses your taxable income, net capital gain, adjusted net capital gain and any unrecaptured section 1250 gain. You apply the conditions within each component.

You can deduct capital losses up to the amount of your capital gains. If you are not a corporation, you can also deduct the lower of $3,000 or the amount by which your capital losses exceed your capital gains. If you are married filing separately, you use $1,500 instead of $3,000.

You may be able to use capital losses above the deduction limit in future years. For details, you can consult the instructions for line 21 of Schedule D. You must report all your capital gains and losses for 2025 even if you cannot use all your losses for that tax year.

If you have a capital loss from disposing of an interest in a passive activity, your loss may be limited. For you as an individual, the capital loss deduction is limited to your capital gains plus the lower of $3,000 or the excess of your capital losses over your capital gains. If you are married filing separately, the dollar limit is $1,500.

You treat capital gains distributions as long term capital gains regardless of how long you held the fund. The applicable rate is 0%, 15% or 20%, depending on your taxable income and filing status. For 2026, if you file jointly, you pay 0% on these distributions up to $98,900 of taxable income.

For tax year 2025, if your fund realizes short term gains, those gains are paid to you as ordinary dividends taxed at 10% to 37%. They are not paid as a capital gains distribution.

If your gain from an installment sale qualifies for long term capital gain treatment in the year of sale, it continues to qualify in later tax years. Your gain is long term if you owned the property for more than one year when you sold it.

Although the installment sale rules refer to Schedule D for Form 1040, you also apply those rules to Schedule D for Forms 1041, 1065 and 1120, and to Schedule D for the S corporation version of Form 1120.

Your section 1231 transactions include sales and exchanges of real or depreciable property that you held longer than one year and used in a trade or business. They also include certain involuntary conversions of business or investment property, including capital assets.