Capital Gains Tax Calculator: Long-Term vs Short-Term Rates 2026

Capital gains taxes can consume 15-40% of your investment profits if you're not strategic—yet most investors trigger unnecessary tax bills by selling at the wrong time, failing to use tax-loss harvesting, or misunderstanding cost basis rules. Someone in the 24% bracket selling stocks held 11 months pays 24% tax, while waiting one more month drops the tax to 15%—saving $900 on a $10,000 gain. High earners in California can face combined federal and state capital gains taxes exceeding 37%.

This comprehensive guide covers long-term vs short-term capital gains rates, calculating your tax liability, cost basis methods, the Net Investment Income Tax (NIIT), state capital gains taxes, tax-loss harvesting strategies, and advanced techniques to minimize capital gains taxes legally.

Table of Contents

1. Long-Term vs Short-Term Capital Gains
2. 2026 Capital Gains Tax Rates
3. Calculating Your Capital Gains Tax
4. Cost Basis Methods
5. Net Investment Income Tax (NIIT)
6. State Capital Gains Taxes
7. Tax-Loss Harvesting Strategies
8. How to Minimize Capital Gains Tax
9. Real Capital Gains Tax Scenarios

Long-Term vs Short-Term Capital Gains

The Critical 12-Month Rule

Holding period determines everything:

Short-term: Held 12 months or less

• Taxed as ordinary income
• Rates: 10-37% (your income tax bracket)
• No special treatment

Long-term: Held more than 12 months

• Preferential tax rates
• Rates: 0%, 15%, or 20%
• Significantly lower taxes

Example: $10,000 capital gain

Held 11 months (short-term):

• Tax at 24% bracket: $2,400

Held 13 months (long-term):

• Tax at 15% rate: $1,500

One month difference saves $900 (37.5% tax reduction)!

Calculating Holding Period

Day you buy: Doesn't count Day you sell: Counts

Example: Buying stock

• Bought: March 15, 2025
• Sell: March 15, 2026 → Short-term (exactly 12 months, not MORE than)
• Sell: March 16, 2026 → Long-term (12 months + 1 day)

Always hold at least one year and one day for long-term treatment.

How the IRS Sees It

Stock purchase date: Trade date, not settlement date

Trade date: When you clicked "buy" Settlement date: 2 business days later (when money moves)

Use trade date for holding period calculation.

Example:

• Bought: Feb 12, 2025 (trade date), settled Feb 16
• Sell: Feb 13, 2026 (trade date)
• Holding period: Feb 12, 2025 → Feb 13, 2026 = Long-term ✓

Special Rules for Different Assets

Stocks/bonds: Clear long-term after 12 months

Real estate:

• Primary residence: Special $250K/$500K exclusion (see below)
• Investment property: Long-term after 12 months
• Depreciation recapture: Taxed at 25% (separate from capital gain)

Mutual funds:

• Holding period starts day after purchase
• Even if fund holds stocks long-term, YOUR holding period is what matters

Inherited assets:

• Always treated as long-term (regardless of how long you held)
• Step-up in basis (cost basis = value at death)

Gifts:

• Inherit donor's holding period
• Receive stock as gift? Donor's purchase date carries over

2026 Capital Gains Tax Rates

Long-Term Capital Gains Rates

Federal rates (2026):

| Filing Status | 0% Rate | 15% Rate | 20% Rate | |---------------|---------|----------|----------| | Single | Up to $47,000 | $47,001-$518,000 | Over $518,000 | | Married Filing Jointly | Up to $94,000 | $94,001-$583,000 | Over $583,000 | | Married Filing Separately | Up to $47,000 | $47,001-$291,500 | Over $291,500 | | Head of Household | Up to $63,000 | $63,001-$551,000 | Over $551,000 |

Based on taxable income, not just capital gains.

Short-Term Capital Gains Rates

Same as ordinary income tax brackets:

| Filing Status | 10% | 12% | 22% | 24% | 32% | 35% | 37% | |---------------|-----|-----|-----|-----|-----|-----|-----| | Single | $0-11,600 | $11,601-47,150 | $47,151-100,525 | $100,526-191,950 | $191,951-243,725 | $243,726-609,350 | Over $609,350 | | Married Joint | $0-23,200 | $23,201-94,300 | $94,301-201,050 | $201,051-383,900 | $383,901-487,450 | $487,451-731,200 | Over $731,200 |

Short-term gains taxed harshly—up to 37% federal!

Example: Same Gain, Different Rates

Single filer, $80,000 salary, $20,000 capital gain

Scenario A: Short-term (held 6 months)

• Total income: $100,000
• Short-term gain taxed at 24%
• Tax on gain: $4,800

Scenario B: Long-term (held 18 months)

• Total income: $100,000 (for bracket determination)
• Long-term gain taxed at 15%
• Tax on gain: $3,000

Waiting 12 months saves $1,800 (37.5% less tax)!

The 0% Long-Term Rate Sweet Spot

Income under $47,000 (single) or $94,000 (married)?

Pay ZERO long-term capital gains tax!

Example: Retiree

• Retirement income: $50,000 (pension/SS)
• Long-term capital gains: $40,000 (stock sales)
• Total: $90,000
• Married filing jointly

Analysis:

• First $94,000 taxed at 0% for LT gains
• But total income is $90,000
• Capital gains tax: $0!

Strategic: Realize gains in low-income years (early retirement, sabbatical, between jobs)

The 3.8% Net Investment Income Tax

Above certain thresholds, pay extra 3.8%:

| Filing Status | NIIT Threshold | |---------------|----------------| | Single | $200,000 | | Married Joint | $250,000 | | Married Separate | $125,000|

Applies to LESSER of:

• Net investment income (capital gains, dividends, interest) OR
• MAGI over threshold

Example: Single, $220,000 income (all wages), $15,000 LT capital gains

• Total: $235,000
• Over $200K by: $35,000
• NIIT applies to: LESSER of $15,000 (investment income) or $35,000 (excess)
• NIIT on $15,000 at 3.8% = $570 extra

Total federal tax on $15,000 LT gain:

• Regular LT cap gains: $2,250 (15%)
• NIIT: $570 (3.8%)
• Total: $2,820 (18.8% effective rate)

High earners face nearly 20% federal rate on long-term gains!

Calculating Your Capital Gains Tax

Basic Capital Gains Formula

Capital Gain = Selling Price - Cost Basis - Selling Costs

Example: Stock sale

• Bought: $10,000
• Sold: $18,000
• Commission: $100
• Capital gain: $18,000 - $10,000 - $100 = $7,900

What is Cost Basis?

Cost basis = What you paid + associated costs

Includes:

• Purchase price
• Commissions/fees to buy
• Reinvested dividends (mutual funds)
• Stock splits (adjusted)

Stock example:

• Bought 100 shares at $50 = $5,000
• Commission: $50
• Cost basis: $5,050 (not $5,000)

Mutual fund:

• Initial purchase: $10,000
• Reinvested dividends over 5 years: $1,500 (you paid tax on these already!)
• Cost basis: $11,500 (not $10,000)

Missing dividend reinvestment = paying tax twice!

Step-by-Step Calculation

Sale of 200 shares:

Step 1: Determine proceeds

• Sale price: $120/share × 200 = $24,000
• Commission: $100
• Net proceeds: $23,900

Step 2: Calculate cost basis

• Purchase price: $80/share × 200 = $16,000
• Commission when buying: $50
• Total basis: $16,050

Step 3: Capital gain $23,900 - $16,050 = $7,850

Step 4: Holding period

• Bought: Jan 10, 2023
• Sold: Feb 15, 2026
• Duration: 3+ years → Long-term

Step 5: Tax

• Assume 15% LT bracket
• Tax: $7,850 × 15% = $1,177.50

Adjustments to Cost Basis

Stock splits:

• Bought 100 shares at $100 = $10,000
• Stock splits 2-for-1
• Now own 200 shares
• Basis per share: $50 (not $100)

Spin-offs:

• Own Parent Co stock, basis $10,000
• Company spins off division
• Receive SpinCo shares (20% of parent value)
• Parent basis: $8,000
• SpinCo basis: $2,000

Wash sale:

• Sell stock at $1,000 loss
• Buy substantially identical stock within 30 days
• Loss disallowed, added to basis of new purchase

Cost Basis Methods

FIFO (First In, First Out)

Default method: Sell oldest shares first

Example: Three purchases

• Jan 2024: 100 shares at $50 = $5,000
• June 2024: 100 shares at $60 = $6,000
• Dec 2024: 100 shares at $70 = $7,000

Sell 150 shares in Feb 2026 at $80:

FIFO assumption:

• First 100 from Jan 2024 ($50 basis)
• Next 50 from June 2024 ($60 basis)

Gain:

• 100 × ($80-$50) = $3,000
• 50 × ($80-$60) = $1,000
• Total: $4,000

Specific Identification

You choose which shares to sell (must designate BEFORE sale)

Same example, but you specify:

"Sell 100 from Dec 2024 and 50 from June 2024"

Gain:

• 100 × ($80-$70) = $1,000
• 50 × ($80-$60) = $1,000
• Total: $2,000

Half the gain of FIFO! (Save $2,000 × 15% = $300 tax)

HOW TO:

• Tell broker BEFORE sale: "Sell tax lot from 12/15/2024"
• Get written confirmation
• Without designation, FIFO applies

Average Cost (Mutual Funds Only)

Mutual funds: Can use average cost

Purchases:

• Jan 2023: $5,000 (100 shares at $50)
• Jan 2024: $6,000 (100 shares at $60)
• Jan 2025: $7,000 (100 shares at $70)
• Total: 300 shares, $18,000 invested

Average cost: $18,000 / 300 = $60/share

Sell 150 shares at $80:

• Gain: 150 × ($80-$60) = $3,000

Simpler than FIFO, no need to track lots

Once chosen, must continue for that fund (can't switch back to FIFO)

Highest Cost (Tax Optimization)

Strategic: Sell highest-cost shares to minimize gain

Portfolio at a peak, need cash, want to minimize taxes:

Use specific identification to sell highest cost basis shares

Goal: Take small gain now, save low-basis shares for future (maybe in low-income year when you can use 0% rate)

Reinvested Dividends Trap

Critical: Track reinvested dividends!

Mutual fund over 10 years:

• Initial purchase: $50,000
• Reinvested dividends: $15,000 (taxed each year as received)
• Total basis: $65,000

Sell for $90,000:

If you forget dividends:

• Gain: $90,000 - $50,000 = $40,000
• Tax at 15%: $6,000

Correctly:

• Gain: $90,000 - $65,000 = $25,000
• Tax at 15%: $3,750

Forgetting costs $2,250 extra! (60% more tax)

Brokerage should track this, but VERIFY

Net Investment Income Tax (NIIT)

What is NIIT?

Additional 3.8% tax on investment income for high earners

Enacted: 2013 (Affordable Care Act)

Applies to:

• Capital gains
• Dividends
• Interest
• Rental income (passive)
• Annuities

NOT subject to NIIT:

• Wages
• Self-employment income (active)
• Social Security
• Tax-exempt interest

NIIT Income Thresholds

3.8% tax applies if MAGI exceeds:

| Filing Status | Threshold | |---------------|-----------| | Single | $200,000 | | Married Joint | $250,000 | | Married Separate | $125,000 | | Head of Household | $200,000 |

No phaseout—it's a cliff

$199,000 income: No NIIT $201,000 income: NIIT applies

Calculating NIIT

NIIT = 3.8% × LESSER of:

1. Net investment income OR
2. MAGI - Threshold

Example 1: Single, $240,000 wages, $30,000 LT capital gains

• MAGI: $270,000
• Net investment income: $30,000
• Excess over $200K: $70,000
• NIIT on LESSER: min($30K, $70K) = $30,000
• NIIT: $30,000 × 3.8% = $1,140

Example 2: Single, $180,000 wages, $30,000 capital gains

• MAGI: $210,000
• Net investment income: $30,000
• Excess over $200K: $10,000
• NIIT on LESSER: min($30K, $10K) = $10,000
• NIIT: $10,000 × 3.8% = $380

Only $10K of $30K gains subject to NIIT

Example 3: Single, $195,000 wages, $30,000 capital gains

• MAGI: $225,000
• Excess over $200K: $25,000
• NIIT on: $25,000
• NIIT: $25,000 × 3.8% = $950

Total Tax Including NIIT

Single filer, $220,000 income, $50,000 LT capital gain

Federal income tax:

• Long-term cap gains: $50,000 × 15% = $7,500

NIIT:

• Excess MAGI: $270,000 - $200,000 = $70,000
• Investment income: $50,000
• NIIT on: min($50K, $70K) = $50,000
• NIIT: $50,000 × 3.8% = $1,900

Total federal: $7,500 + $1,900 = $9,400 (18.8% effective rate)

Long-term gains aren't 15% for high earners—they're 18.8%!

Strategies to Avoid NIIT

Stay under threshold:

• Max 401k contributions (reduce MAGI)
• HSA contributions (reduce MAGI)
• Traditional IRA (if eligible)

Time gains strategically:

• Spread over multiple years
• Realize in low-income years

Use tax-advantaged accounts:

• Roth accounts (no MAGI impact on withdrawals)
• Municipal bonds (interest exempt)

State Capital Gains Taxes

States With No Income Tax

No capital gains tax (9 states):

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Huge advantage for high earners!

High Capital Gains Tax States

2026 top combined rates (Federal 20% + State):

| State | State Rate | Combined Rate | $50K Gain Tax | |-------|------------|---------------|---------------| | California | 13.3% | 33.3% | $16,650 | | New York | 10.9% | 30.9% | $15,450 | | New Jersey | 10.75% | 30.75% | $15,375 | | Oregon | 9.9% | 29.9% | $14,950 | | Minnesota | 9.85% | 29.85% | $14,925 | | DC | 10.75% | 30.75% | $15,375 |

California vs Texas on $50K gain:

• California: $16,650 tax
• Texas: $10,000 tax (federal only)
• Difference: $6,650!

How State Tax is Calculated

California example:

• Federal long-term rate: 15%
• California rate: 13.3% (regular income tax, no preferential rate)
• Combined: 28.3% (not counting NIIT)

Most states tax capital gains as regular income (no special rate like federal)

Residency Tricky Issues

Moved mid-year:

Example: Move from CA to TX in July

• Realize $100K capital gain in December (TX resident)
• California: May try to tax portion (were resident for 7 months)
• Texas: No state tax

Safe harbor: Establish clear residency before realizing large gains

• Change driver's license
• Register to vote
• Move primary residence
• Close CA bank accounts
• File declaration of domicile

Timing gains after clean break = save thousands

Capital Gains Tax By State

Low-rate states (under 5%):

• Arizona: 3.5%
• Colorado: 4.55%
• North Dakota: 2.9%
• Pennsylvania: 3.07%

Moderate-rate states (5-7%):

• Georgia: 5.75%
• Illinois: 4.95% (flat)
• Indiana: 3.23%
• Michigan: 4.25%
• Ohio: ~4%

High-rate states (over 7%):

• Connecticut: 6.99%
• Idaho: 6.5%
• Iowa: 6%
• Massachusetts: 5% (but special 12% on short-term gains!)
• Vermont: 8.75%
• Wisconsin: 7.65%

Massachusetts special rule: Short-term gains: 12%! Long-term gains: 5%

Extreme penalty for short-term trades in MA

Tax-Loss Harvesting Strategies

What is Tax-Loss Harvesting?

Sell investments at a loss to offset gains

Example:

• Stock A: $10,000 gain
• Stock B: down $4,000
• Sell both

Tax impact:

• Net gain: $10,000 - $4,000 = $6,000
• Tax at 15%: $900 (saved $600 by harvesting loss)

Then: Buy similar (not identical) stock to maintain exposure

The $3,000 Annual Loss Deduction

Losses exceed gains:

Scenario:

• Gains: $5,000
• Losses: $12,000
• Net: -$7,000 loss

Can deduct:

• Offset all gains: $5,000
• Plus up to $3,000 against ordinary income
• Total current year: $8,000

Remaining $-7,000 - $8,000 used = still have losses Actually: -$7,000 + $5,000 gains = -$2,000 remaining

Let me recalculate:

• Losses: $12,000
• Gains: $5,000
• Net loss: $7,000
• Use: $5,000 (offset gains) + $3,000 (against income) = $8,000 used
• Carry forward: $0 (Wait, this is wrong—should be -$7,000 loss)

Correct:

• Net capital loss: $7,000
• Offset against ordinary income: $3,000
• Carry forward to next year: $4,000

Capital losses never expire—carry forward forever

Wash Sale Rule

Cannot claim loss if you buy "substantially identical" security within 30 days

Wash sale period: 61 days

• 30 days before sale
• Day of sale
• 30 days after sale

Example: Sell stock at loss

• Sell AAPL on Dec 15 at $5,000 loss
• Buy AAPL on Dec 20
• Loss disallowed! (wash sale)

Workarounds:

• Buy similar but not identical (buy MSFT instead of AAPL)
• Buy ETF instead of individual stock
• Wait 31 days to repurchase
• Have spouse buy in their account (risky—IRS may disallow)

Tax-Loss Harvesting Strategy

Annual tax-loss harvesting:

December each year:

1. Review portfolio
2. Identify positions with losses
3. Check if you have gains this year
4. Sell losers to offset gains
5. Immediately buy similar securities (avoid wash sale)
6. Maintain market exposure

Example: End of year portfolio

• Tech stock A: $20,000 gain (sell, take profit)
• Tech stock B: $8,000 loss (sell, offset)
• Immediately buy: Tech ETF (maintain exposure)
• Net gain: $12,000 (taxable)
• Saved: $8,000 × 15% = $1,200 in taxes

January 1: Can buy back original stock (31 days later, no wash sale)

Long-Term Tax-Loss Harvesting Partners

Match loss character with gain character:

Long-term gain? Harvest long-term loss (better offset) Short-term gain? Harvest short-term loss (better offset)

Optimal: Offset short-term gains (taxed high) with short-term losses

If have both:

1. ST losses offset ST gains first
2. Remaining ST losses offset LT gains (good!)
3. LT losses offset LT gains
4. Net loss: Deduct $3,000 vs ordinary income

Tax-Loss Harvesting Example

Portfolio situation:

• Stock A: $30,000 gain (long-term)
• Stock B: $8,000 loss (long-term, unrealized)
• Stock C: $5,000 loss (long-term, unrealized)
• Income: $180,000 (24% bracket)

Strategy 1: Don't harvest

• Sell Stock A only
• Gain: $30,000
• Tax: $4,500 (15% × $30K)

Strategy 2: Harvest losses

• Sell A, B, and C
• Gains: $30,000
• Losses: $13,000
• Net: $17,000
• Tax: $2,550 (15% × $17K)

Savings: $1,950

Then: Buy replacements for B and C (maintain exposure)

How to Minimize Capital Gains Tax

Strategy 1: Hold Long-Term

Simplest strategy: Wait 12+ months

$50,000 gain:

• Short-term (24% bracket): $12,000 tax
• Long-term (15% rate): $7,500 tax
• Saved: $4,500 (just by waiting)

Strategy 2: Time Sales in Low-Income Years

Scenario: Between jobs

Normal income: $120,000 (24% bracket, 15% LT gains)

Sabbatical year income: $40,000 (12% bracket)

Sell $50,000 of appreciated stock:

• Single filer
• Income: $40,000 + $50,000 = $90,000
• Under $9 4,000 married or $47,000 single threshold?

Let me recalculate for single:

• Income w/ gains: $90,000
• Single 0% LT threshold: $47,000
• Over threshold, so 15% applies

Actually: Need to be more precise with taxable income vs MAGI.

Better example: Retiree

• Retirement income: $35,000
• Realize $25,000 LT gains
• Total: $60,000
• Single filer under $47K for gains? No, total is $60K.
• But first $47K of taxable income can have 0% on gains

Complex—but KEY: Low-income years = opportunity for 0% or lower LT rate

Strategy 3: Use Tax-Advantaged Accounts

Roth IRA/401k:

• All gains tax-free forever
• No capital gains tax on sales within account

Traditional IRA/401k:

• Gains grow tax-deferred
• Pay ordinary income tax on withdrawal (not capital gains—actually worse)
• But no tax during accumulation

HSA:

• Tax-free growth
• Tax-free withdrawal (for medical)
• Can trade stocks within HSA with no tax

529 Plan:

• Tax-free growth for education
• No capital gains on trades within account

Maximize these accounts first before taxable investing

Strategy 4: Gift Appreciated Assets

To children in low bracket:

• Your basis: $10,000
• Value now: $30,000
• Gift to child (college student, no income)
• Child sells: $20,000 gain, pays 0% LT rate
• Tax: $0

You sell: $20,000 × 15% = $3,000 tax

Saved: $3,000

Limits:

• Kiddie tax rules (under 19, or under 24 if student)
• Gift tax consideration ($18,000/year per person)

To charity:

• Donate stock worth $10,000 (basis $2,000)
• Charity sells, pays no tax (tax-exempt)
• You deduct $10,000 fair market value
• Avoid $1,200 capital gains tax (15% × $8K), get $2,400 income tax deduction (24% × $10K)

Win-win if charitably inclined

Strategy 5: Primary Residence Exclusion

Sell primary home:

• $250,000 gain exclusion (single)
• $500,000 gain exclusion (married)

Requirements:

• Owned 2+ years
• Lived in as primary residence 2 of last 5 years

Example: Married couple

• Bought: $300,000
• Sold: $850,000
• Gain: $550,000
• Exclusion: $500,000
• Taxable: $50,000
• Tax at 15%: $7,500

Huge benefit! Most Americans never pay capital gains on home sale.

Strategy 6: Opportunity Zones

Invest capital gains in Qualified Opportunity Zone Fund:

Benefits:

• Defer capital gains tax until 2026 or when you sell QOZ investment
• Reduce deferred gain by 10% (if held 5+ years)
• Eliminate ALL tax on QOZ investment gains (if held 10+ years)

Example:

• Realize $100,000 capital gain
• Invest in QOZ within 180 days
• Defer $100K tax until 2026
• Hold QOZ 10 years
• QOZ grows to $200,000
• Sell QOZ: $100,000 gain tax-free!

Complex, requires long commitment, but powerful

Strategy 7: Die With Appreciated Assets

Morbid but effective: Step-up in basis at death

Your situation:

• Stock basis: $50,000
• Current value: $500,000
• Unrealized gain: $450,000

If you sell: $450,000 × 15% = $67,500 tax

If you die and pass to heirs:

• Heir's basis: $500,000 (stepped up)
• Heir sells immediately: $0 gain
• Tax: $0

$67,500 saved by not selling before death

Strategy for retirees:

• Sell low-basis assets early (when needed for spending)
• Keep highest-basis assets until death (avoid tax forever)

Strategy 8: 1031 Exchange (Real Estate)

Investment property: Defer gain by buying replacement

Requirements:

• Like-kind property (real estate for real estate)
• Must identify replacement within 45 days
• Must close within 180 days
• Use qualified intermediary

Example:

• Sell rental property: $400,000 gain
• Buy new rental within 180 days
• Defer all $400,000 gain
• Tax: $0 (deferred)

Can repeat indefinitely (until death, then basis steps up!)

Not available for stocks (only real estate)

Real Capital Gains Tax Scenarios

Scenario 1: Tech Employee Stock Options

Profile:

• Income: $150,000
• Received ISOs (Incentive Stock Options) 3 years ago
• Exercised 2 years ago at $10/share (1,000 shares)
• Stock now worth $110/share
• Married filing jointly

Analysis: Sell now

• Proceeds: 1,000 × $110 = $110,000
• Basis: 1,000 × $10 = $10,000
• Gain: $100,000 (long-term)

Tax:

• Income with gain: $250,000
• Under NIIT threshold ($250K): No NIIT
• LT cap gains rate: 15%
• Federal: $100,000 × 15% = $15,000
• State (California): $100,000 × 13.3% = $13,300
• Total: $28,300 (28.3% effective)

After-tax proceeds: $110,000 - $28,300 = $81,700

Decision: Hold or sell?

• If stock drops 25%: Would have $82,500 before tax (still better)
• If stock rises 25%: Would have $137,500 before tax, $40K+ tax
• Risk tolerance determines answer

Scenario 2: Retiree Using 0% Rate

Profile:

• Age: 63 (retired)
• Social Security: $28,000
• Pension: $0
• Investment portfolio: $800,000
• Married filing jointly

Strategy: Realize $60,000 gains annually

• Income: $28,000
• Plus gains: $60,000
• Total: $88,000
• Under $94,000 married 0% threshold: YES
• Federal capital gains tax: $0!

Over 10 years:

• Realize $600,000 gains tax-free
• Saved: $600,000 × 15% = $90,000!

At age 73 (RMDs start):

• Higher income from Traditional IRA withdrawals
• May jump to 15% bracket
• But already converted portfolio to realized low-basis

Brilliant strategy for early retirement years

Scenario 3: Tax-Loss Harvesting Portfolio

Profile:

• Income: $200,000
• Portfolio: $500,000
• Volatile year: Some up, some down

December review:

• Stock A: $40,000 gain (planning to sell)
• Stock B: $15,000 loss (still like the sector)
• Stock C: $8,000 loss (ready to move on)

Strategy:

• Sell A, B, and C
• Gains: $40,000
• Losses: $23,000
• Net: $17,000
• Buy similar ETF to replace B immediately
• Buy B again in February (no wash sale)

Tax (single filer):

• Net gain: $17,000
• Rate: 15%
• Tax: $2,550

Without harvesting:

• Gain: $40,000
• Tax: $6,000

Savings: $3,450 (from one year of harvesting)

Do this every year for decades!

Scenario 4: Crypto Gains

Profile:

• Bought Bitcoin: $20,000 (2022)
• Value now: $120,000 (2026)
• Held 4 years
• Single, $95,000 income

Sale tax:

• Gain: $100,000 (long-term)
• Income with gain: $190,000
• Under $200K NIIT: Yes
• LT rate: 15%
• Federal: $15,000

State (Colorado):

• Colorado: 4.55%
• State tax: $4,550

Total tax: $19,550 (19.55%)

After-tax proceeds: $120,000 - $19,550 = $100,450

Mistake many make: Think crypto isn't taxed Crypto taxed SAME as stocks!

Scenario 5: Inherited Stock

Profile:

• Inherited stock from grandmother
• Her basis: $30,000 (bought 1980)
• Value at death (2024): $300,000
• Your basis (step-up): $300,000
• You sell immediately: $310,000

Tax:

• Gain: $310,000 - $300,000 = $10,000
• Holding period: Always long-term for inherited assets
• Tax at 15%: $1,500

If there was NO step-up:

• Gain: $310,000 - $30,000 = $280,000
• Tax at 15%: $42,000

Step-up saved: $40,500!

This is why wealthy keep appreciated assets until death

Scenario 6: Moving States Tax Play

Profile:

• Live in California
• Want to sell startup stock: $2 million gain
• Single filer

If sell in California:

• Federal (20% + 3.8% NIIT): $476,000
• California (13.3%): $266,000
• Total: $742,000 (37.1%)

If move to Florida first:

• Federal: $476,000
• Florida: $0
• Total: $476,000 (23.8%)

Saved: $266,000!

Strategy:

1. Resign job, move to FL
2. Establish residency (6+ months)
3. Sell stock
4. Save $266K

Worth it? Absolutely for large gains!

California's FTB watches for this (prove legitimate move, not tax dodge)

Key Takeaways

✓ Hold 12+ months for long-term rates: 15-20% vs 24-37% short-term can save thousands

✓ Low earners can use 0% rate: Under $47K single ($94K married) = zero long-term capital gains tax

✓ NIIT adds 3.8% for high earners: Over $200K single ($250K married) face 18.8-23.8% federal rates

✓ State taxes vary enormously: California 13.3% vs Texas/Florida 0% = $13,300 vs $0 on $100K gain

✓ Tax-loss harvesting saves money: Offset gains with losses annually, carry forward unused losses forever

✓ Track cost basis carefully: Include reinvested dividends, commissions, splits—missing basis = overpaying tax

✓ Use tax-advantaged accounts: Roth IRA, 401k, HSA grow tax-free, eliminating capital gains entirely

✓ Primary residence exclusion is huge: $250K/$500K tax-free on home sale for most homeowners

Conclusion

Capital gains taxes can consume 15-40% of investment profits depending on holding period, income level, state of residence, and strategic timing. The single most impactful decision is holding investments longer than 12 months—converting short-term gains taxed at 24-37% to long-term gains taxed at 0-20%—potentially saving $2,000-4,000 per $10,000 gain for moderate earners.

State residency matters enormously: California's 13.3% state capital gains tax means selling a $1 million gain costs $133,000 to California vs $0 to Texas or Florida residents. High-income individuals facing $2 million+ gains can save $200,000-500,000 by establishing legitimate residency in a no-tax state before selling.

The 0% long-term rate for low-income filers is profoundly underutilized: retirees with less than $47,000 (single) or $94,000 (married) taxable income can realize tens of thousands in capital gains completely tax-free. This makes early retirement years (after leaving work, before required minimum distributions start) the optimal window for selling appreciated positions.

Tax-loss harvesting—selling losers to offset winners—provides annual tax savings that compound over decades. Harvesting $10,000 in losses annually saves $1,500/year at 15% rate, totaling $30,000 over 20 years. Combined with specific lot identification (selling highest-cost shares first), strategic investors can reduce lifetime capital gains taxes by 20-40%.

Use our capital gains tax calculator to input your specific gains, holding period, income level, and state to determine exact tax liability and identify strategies to minimize your capital gains taxes legally.

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• How to Avoid Capital Gains Tax