Capital gains can be a good problem to have. However, selling an investment can trigger tax. As a result, your tax bill can rise with your sale proceeds. With the right planning, you may reduce capital gains tax and avoid surprises.
Below is a simple overview of the rules. Then, you’ll find four practical strategies to consider for 2026.
Can you qualify for the 0% long-term capital gains rate?
Some investment income can be tax-free. In 2026, the 0% rate on long-term capital gains and qualified dividends applies up to these taxable income levels:
- Single: up to $49,450
- Married filing jointly: up to $98,900
- Head of household: up to $66,200
At first glance, those limits may look low. But deductions reduce taxable income. For example, the standard deduction or itemized deductions can create more room in the 0% bracket.
This 0% bracket can help recent retirees. In particular, it can help before Social Security starts. Likewise, it can help before required minimum distributions (RMDs) begin.
Example:
Harry and Meg are married and retired at 64. They use dividends and capital gains for living expenses. Meanwhile, they delay Social Security to age 70. In addition, they delay RMDs until age 73. In 2026, they can earn up to $131,100 tax-free. That total combines the $98,900 limit and the $32,200 standard deduction.
Holding periods and tax rates
Your holding period matters. Specifically, it helps determine which tax rate applies.
- Held one year or less: the gain is short-term. Therefore, you pay your ordinary income tax rate (generally 10% to 37%).
- Held more than one year: the gain is long-term. In that case, you may pay 0%, 15%, or 20%.
Many taxpayers in the middle income ranges pay 15% on long-term gains. Even so, the 20% long-term rate can apply before the top 37% ordinary rate applies.
Also, some taxpayers owe the Net Investment Income Tax (NIIT). If it applies, it can add 3.8%.
Four tax-saving strategies for capital gains
1) Monitor your holding periods
Short-term gains often cost more. So, check your holding period before you sell. If you are close to one year, consider waiting. That way, you may qualify for long-term treatment.
2) Harvest tax losses
Losses can offset gains. In addition, they can offset ordinary income.
Here is a simple example.
You have a $5,000 long-term gain. At the same time, you have a $9,000 long-term loss. Your net is a $4,000 long-term loss. You can use up to $3,000 per year against ordinary income. Then, you can carry forward the remaining $1,000.
However, watch the wash sale rule. It can disallow the loss if you repurchase too soon.
3) Be cautious with year-end mutual fund purchases
Many mutual funds pay capital gain distributions in December. Shareholders owe tax on those payouts. Because of that, buying right before a distribution can raise your tax bill. Instead, consider waiting until after the distribution date—if it still fits your investment plan.
4) Watch for the NIIT
The NIIT can apply if your MAGI exceeds:
- $200,000 (single)
- $250,000 (married filing jointly)
- $125,000 (married filing separately)
The NIIT equals 3.8% of the lesser of:
- your net investment income, or
- the amount your MAGI exceeds the threshold.
Since NIIT depends on MAGI, MAGI planning matters. For example, retirement plan contributions may help reduce MAGI. Similarly, loss harvesting may reduce net investment income. Still, the best approach depends on your full tax picture.
Timing isn’t everything
Timing matters. But it is only one tool. In practice, a good plan also considers income, deductions, and cash needs. Finally, it should match your long-term goals. A tax advisor can help you model options before you sell.
FAQ
What is the difference between short-term and long-term capital gains?
Short-term gains come from assets held one year or less. As a result, they are taxed at ordinary income rates. Long-term gains come from assets held more than one year. In many cases, they qualify for lower rates.
How does the 0% long-term capital gains rate work in 2026?
The 0% rate applies when your taxable income stays within the 0% bracket for your filing status. Because taxable income is income after deductions, deductions can help you stay in the 0% range.
Do qualified dividends get the same tax rates as long-term capital gains?
Often, yes. Generally, qualified dividends can receive the same 0%/15%/20% rates. However, they must meet IRS rules, including holding-period rules.
What is tax-loss harvesting?
Tax-loss harvesting means selling investments at a loss. Then, you use the loss to offset gains. If losses exceed gains, you can usually offset up to $3,000 of ordinary income each year. After that, you carry forward the rest.
What is the wash sale rule?
The wash sale rule can disallow a loss. For example, it may apply if you buy the same or a “substantially identical” security within a short window around the sale. Therefore, plan replacement investments carefully.
Why should I be careful buying mutual funds near year-end?
Funds often distribute gains late in the year. If you buy right before the payout, you may owe tax on that distribution. Also, the fund price may drop after the payout. So, timing can affect your tax result.
What is the Net Investment Income Tax (NIIT)?
NIIT is an extra 3.8% tax on certain investment income. In general, it can apply when your MAGI exceeds the thresholds and you have net investment income.
Can I reduce NIIT exposure?
Sometimes. For instance, loss harvesting can reduce net investment income. In addition, MAGI planning can help. As an example, retirement plan contributions may lower MAGI. Your advisor can help you test options.