Long-Term Capital Gain

What it means

When you buy an investment like stock and hold it for more than one year before selling, the profit you make is called a long-term capital gain. Because you kept the investment for a long time, the government often taxes this profit at lower rates than your normal salary.

The specific tax rate—0%, 15%, or 20%—depends on your total yearly income. In 2026, the highest 20% rate begins if you earn over $545,500 as a single filer or $613,700 for joint filers. High earners may also owe an extra 3.8% tax on investment income.

A simple example

Imagine Sarah buys 100 shares of company stock for $1,000. She holds the shares for two years and then sells them for $2,000. Her profit (the capital gain) is $1,000. Because she held the stock for over a year, she pays a lower tax rate on that $1,000 profit than she would if she had sold it after only one month.

Why it matters to you

• You keep more of your profit because the federal tax rate on these gains is usually lower than the rate on your wages.
• Most states do not offer this lower rate and will tax your profit just like your regular salary.
• If you sell too early, you may lose the tax break and owe higher taxes.

Common mistakes to avoid

• Forgetting that most states tax these profits as regular income, which can be a surprise at tax time.
• Selling too soon and triggering a short-term gain, which is taxed at your higher regular income tax rate.
• Assuming you only owe federal tax without checking if you also owe the 3.8% Net Investment Income Tax.

Words used on this page

• Capital Gain: The profit you earn when you sell an asset for more than what you originally paid for it.
• Net Investment Income Tax (NIIT): An extra 3.8% tax on investment income for people with high total income.
• Ordinary Income: Money you earn from sources like your job, which is taxed at your standard income tax rate.
• Taxable Income: The portion of your total income that is actually used to calculate your taxes after deductions.