Capital Gains Tax

Short-term vs long-term

Short-term capital gains — gains on assets held for one year or less. Taxed at your ordinary income tax rate, same as wages.

Long-term capital gains — gains on assets held for more than one year. Taxed at preferential rates: 0%, 15%, or 20%, depending on your taxable income.

The difference is significant. A high-income investor might pay 37% on a short-term gain vs 20% on the same dollar of gain held one more day past the one-year mark. This is the core reason most investment strategies emphasize long holding periods.

The 2026 long-term rates and thresholds

For single filers, the thresholds are roughly half. The 0% bracket is an often-overlooked planning opportunity — married couples in the 12% ordinary bracket owe nothing on long-term gains up to the bracket top.

The Net Investment Income Tax (NIIT)

On top of the base capital gains rate, taxpayers with high incomes pay an additional 3.8% NIIT on investment income (including capital gains, dividends, interest) above:

• $200,000 (single)
• $250,000 (MFJ)
• $125,000 (MFS)

So the effective top rate on long-term gains for high earners is 23.8% (20% + 3.8%). For short-term gains, it's 40.8% (37% + 3.8%).

Qualified dividends

Most dividends from U.S. and many foreign companies are "qualified" and taxed at the same preferential rates as long-term capital gains. REIT dividends are typically not qualified and are taxed as ordinary income (though a portion may qualify for the 20% QBI deduction).

This is one reason REITs are often held in tax-advantaged accounts.

Basis

Your "basis" in an asset is what you paid for it. When you sell, the gain or loss is the difference between sale price and basis:

• Buy $10,000 of a stock, sell for $15,000: $5,000 gain.
• Buy $10,000, sell for $7,000: $3,000 loss.

Basis adjustments can shift this:

• Reinvested dividends add to your basis over time.
• Stock splits reduce per-share basis proportionally.
• Return of capital distributions reduce basis.
• Wash-sale rule disallowed losses add to the basis of the replacement shares.

Good records matter. Brokerages track basis for most securities purchased after 2011, but older positions may have missing basis information.

Specific identification vs default methods

When you sell some of a position but not all, which shares are you selling? Default is usually First In, First Out (FIFO) — the oldest shares are considered sold first.

You can specify which shares to sell ("specific identification"), which can dramatically lower the tax bill. If you bought shares at $50, $60, and $70 and sell at $65, identifying the $70 shares produces a loss; the $50 shares produce a gain. This is a critical tool for tax-loss harvesting.

Coordinating with ordinary income

Long-term gains stack on top of ordinary income. An investor with $70,000 ordinary income and $50,000 of long-term gains (MFJ) has total taxable income of $120,000. The long-term gains fill the remaining 0% bracket (up to ~$98,900) and then move into the 15% bracket.

• $28,900 of the gain falls in the 0% bracket (from $70,000 ordinary to $98,900).
• $21,100 of the gain falls in the 15% bracket.
• Total LT gains tax: $3,165.

This stacking means the effective rate on capital gains can be much lower than the "headline" 15% or 20% — if you can manage your ordinary income in low years.

Early retirement and the 0% bracket

Retired couples living off a combination of taxable investments, Roth balances, and a limited amount of pre-tax retirement distributions often can stay in the 0% LT gains bracket entirely. Selling appreciated positions in early retirement to realize gains at 0% is a powerful — and counterintuitive — tool.

How Horizons uses this

Horizons models taxable investment accounts with an assumed blend of short-term and long-term gain realization. Asset-linked income-linked expenses apply the correct preferential rates for long-term gains. When testing strategies like "sell all positions in 2027," the engine applies the full tax bill for that year, which helps you see the cost of concentrated realizations.