Capital gains tax: the tax on profits from selling stocks, real estate, a business, and other investments.
Quick estimate
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The situation
A capital gain is the profit you make when you sell an asset — stocks, bonds, real estate, a business — for more than you paid. Gains on assets held for a year or less are short-term and are taxed like wages, at ordinary income tax rates of up to 37%. Gains on assets held longer than a year are long-term and get lower rates: 0%, 15%, or 20%, depending on your income. High earners also pay the 3.8% Net Investment Income Tax, so the top federal rate on long-term gains is 23.8%, compared with 40.8% on the highest wages (37% plus 3.8% Medicare taxes).
| Rate, 2026 | Single: taxable income | Married filing jointly |
|---|---|---|
| 0% | Up to $49,450 | Up to $98,900 |
| 15% | $49,450 – $545,500 | $98,900 – $613,700 |
| 20% | Over $545,500 | Over $613,700 |
You only pay the tax when you sell. And if you hold an asset until you die, the gain is never taxed: your heirs inherit it at its value on the date of death — a step-up in basis — so the gain built up during your lifetime is wiped out for tax purposes. That gives people a strong reason to hold on to appreciated assets rather than sell them. The 2025 tax law (the One Big Beautiful Bill Act) left capital gains rates unchanged. Proposals over the years have included taxing gains as ordinary income for people with very high incomes, ending step-up in basis, and adjusting gains for inflation.
Historical context
Long-term capital gains have been taxed at a lower rate than wages for most of the last century — but how much lower has swung widely. The chart compares the top rate on long-term gains with the top rate on ordinary income such as wages and salaries.
Top federal tax rates. Capital gains include surtaxes such as the 3.8% NIIT; ordinary income excludes Medicare taxes. Approximate.
The first preferential rate, 12.5%, arrived in 1922 under Treasury Secretary Andrew Mellon. Rates rose during the Depression and World War II, settled at 25% for most of the postwar era, then climbed to nearly 40% in the 1970s as surtaxes and a minimum tax were layered on. The 1978 and 1981 tax cuts brought the top rate down to 20%. The Tax Reform Act of 1986, signed by President Ronald Reagan with bipartisan support in Congress, did something unusual: it taxed gains and wages at the same 28% top rate (from 1988), in exchange for cutting the top rate on wages from 50% and closing many loopholes. Within a few years the gap was back, as the top income tax rate rose to 31% in 1991 and 39.6% in 1993. The top rate fell to 20% in 1997 and 15% in 2003, then rose to 23.8% in 2013, when the 20% rate returned and the 3.8% Net Investment Income Tax was added to help fund the Affordable Care Act.
International context
Counting the average state tax, the top US rate (about 28.7%) is in the upper middle of wealthy countries. Several European countries tax gains more heavily — Denmark at 42% — while others, like Switzerland, don't tax most individual gains on shares at all. Comparisons are tricky: countries differ in what counts as a gain, how long you have to hold an asset, and whether they also tax wealth or inheritances.
Effects of change options
Here are four options for the tax on long-term capital gains. (Short-term gains are already taxed like wages.) How would each option change revenue, the deficit, inequality, and the simplicity of the tax code? Ending step-up in basis matters a lot here: if gains are taxed at death, people can no longer avoid the tax just by holding on, so higher rates raise more.
| Option | Top federal rate | Capital gains revenue, % of GDP | Change in deficit, FY2027 | …if step-up is also ended* | Inequality | Simplicity |
|---|---|---|---|---|---|---|
| Keep current rates | Leave long-term gains taxed at 0%, 15%, or 20%, depending on income, plus 3.8% on high incomes. | |||||
| 23.8% | 0.70% | — | — | No change. | No change. | |
| Reduce to zero | Abolish the tax on long-term capital gains. | |||||
| 0% | 0.00% | +$233B | +$233B | Widens: most gains go to the highest-income households. | Simpler for investors, but a bigger incentive to relabel wages and business income as gains. | |
| Same as ordinary income | Tax long-term gains at the same rates as wages and salaries. | |||||
| 40.8% | 0.84% | −$46B | −$73B | Narrows: the extra tax falls mostly on the highest-income households. | Much simpler: no separate rates, and no reason to relabel income as gains. | |
| 30% above income rates | Tax long-term gains at 30% more than ordinary income rates (top rate about 53%). | |||||
| 53% | 0.84% | −$48B | −$95B | Narrows, at least on paper, though people may hold assets longer to avoid selling. | More complex again: a separate, higher rate schedule, and an incentive to relabel gains as wages. | |
* Step-up in basis: when someone dies, the starting value of what they leave is “stepped up” to its value at death, so gains built up during their lifetime are never taxed. Ending step-up would tax those gains (at death, or when the heirs sell) — and remove the reason to hold investments until death just to avoid the tax.
Red = deficit goes up; green = deficit goes down. In the Inequality and Simplicity columns, green means less inequality or a simpler tax code, amber no change, and orange or red the reverse. Rough Rebalance model estimates — see Wonkery below. Because people can put off selling, higher rates raise less than you might expect: in this model, revenue peaks when the average rate is around 30%.
Pros and cons
Lower taxes on investment returns encourage people to save and invest, which funds new businesses and raises productivity and wages over time.
Much of a stock's gain reflects company profits that were already taxed through the corporate income tax.
Gains are not adjusted for inflation, so part of a long-held “gain” is just rising prices — and the real tax rate can be much higher than the stated rate.
Income is income. It is unfair that someone living on investment gains can pay a lower rate than a nurse or an electrician pays on wages.
Most capital gains go to the highest-income households, so the lower rate mainly benefits them and widens inequality.
Two sets of rates invite tax planning to relabel wages and fees as capital gains (as with “carried interest”). Equal rates would remove that incentive and simplify the tax code.
Contributed pros and cons
What notable people — and other users — have said. Rate how much you agree with each.
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NextInequalityEstate taxPersonal income taxRed Ink — Deficit & Debt
Wonkery
Revenue estimates use the same rough model as the capital gains slider on Quick Rebalance:
- Today, taxes on realized capital gains raise about 0.7% of GDP, at an average effective rate of about 15%. Realized gains are projected to average about 3.7% of GDP.
- When the rate rises, people sell less (and hold assets until death, when step-up wipes out the gain), so revenue rises less than in proportion — and eventually falls. In the model, revenue peaks at an average rate of about 30%, or about 40% if step-up in basis is ended.
- Taxing gains like ordinary income would raise the average rate from about 15% to about 26%; 30% above ordinary rates, to about 33%.
- Dollar figures use CBO's projected FY2027 GDP of about $33.3 trillion. These are rough approximations for education, not official scores.
Sources
Photo credits
Warren Buffett: U.S. Department of Commerce (public domain), via Wikimedia Commons. Vinod Khosla: at SXSW 2024, Austin, Texas, via Wikimedia Commons. Other speaker photos are official portraits in the public domain.