Need to Know Tax › Deductions, credits, and gains
Deductions, credits, and gains
Capital gains: how your gains are taxed
Why the same $20,000 profit can cost nothing, $3,000 or $4,760 in federal tax depending on who sells it, and why the rules about basis, losses and timing are where the money is made or lost.
When you sell stock, real estate or another investment for more than you paid, the profit is a capital gain. How it is taxed depends mostly on how long you owned the asset and on what else is on your return. For a surprising number of retirees and moderate-income families the federal rate is zero. For everyone, the rules around basis, losses and timing are where the money is made or lost.
Short-term, long-term, and the 2026 rates
One year and a day is the line that matters most. Short-term gains, on assets held one year or less, are taxed like wages at your ordinary bracket rate. Long-term gains, on assets held more than one year, get their own lower rates, and qualified dividends get the same rates. Selling on the one-year anniversary is still short-term.
| Rate | Single | Married filing jointly |
|---|---|---|
| 0% | Taxable income up to $49,450 | Up to $98,900 |
| 15% | Up to $545,500 | Up to $613,700 |
| 20% | Above $545,500 | Above $613,700 |
Thresholds are taxable income, after the standard or itemized deduction, and include the gain itself. Add the 3.8% net investment income tax above $200,000 of modified AGI single or $250,000 joint, which takes the top combined federal rate to 23.8%.
Worked example: the same $20,000 gain, three sellers
Each sells stock held more than a year for a $20,000 long-term gain. Nothing else about the sale differs.
| Retired couple | Working couple | High earner, single | |
|---|---|---|---|
| Taxable income before the gain | $60,000 | $150,000 | $600,000 |
| Taxable income with the gain | $80,000 | $170,000 | $620,000 |
| Rate on the gain | 0% | 15% | 20% + 3.8% |
| Federal tax on the $20,000 | $0 | $3,000 | $4,760 |
| Colorado tax at 4.40% | $880 | $880 | $880 |
The retired couple’s stack stays under the $98,900 line, so the whole gain is in the 0% layer. Colorado does not care about the layers; it taxes every dollar of the gain at 4.40%.
How the 0% bracket works
Think of your taxable income as a stack. Wages, pensions, IRA withdrawals and interest go on the bottom and are taxed at the ordinary brackets. Long-term gains and qualified dividends go on top. Whatever part of that top layer sits below $49,450 single or $98,900 joint is taxed at 0%; the part above is taxed at 15%.
Take a married couple with $70,000 of ordinary taxable income who sell stock for a $40,000 long-term gain. The stack now reaches $110,000. The first $28,900 of the gain, from $70,000 up to the $98,900 line, is taxed at 0%. The remaining $11,100 is taxed at 15%, or $1,665. The gain cost them about 4%, not 15%. Had they sold $28,900 worth in December and the rest in January, this year’s federal tax on the gain would have been zero, and next year’s might be too.
A retired couple living on Social Security and a modest pension can often sell appreciated stock every year without federal tax on the gains, as long as the stack stays under the line. Selling and immediately buying back the same shares at 0% is legal and resets the basis higher; the wash-sale rule applies only to losses.
Behind the scenes
Before a client sells a large position, a preparer runs the return both ways. A gain raises adjusted gross income, and AGI drives the taxable share of Social Security, the Medicare premium two years out, the senior deduction phase-out and the Marketplace premium credit. A gain taxed at 0% can still cost a retiree real money through one of those side doors: a $30,000 gain that is tax-free on Schedule D can make $25,000 more of Social Security taxable and push the couple into a higher Medicare tier for a year. Splitting the sale across two tax years is often the whole answer.
Basis: the number that decides the gain
Your gain is the sale price minus your basis. Get the basis wrong and you pay tax on money you never made.
What you paid, plus. Basis starts with the purchase price, including commissions. For property, add the cost of improvements: a new roof, a finished basement, an addition. Keep those receipts as long as you own the property.
Reinvested dividends. Every dividend you reinvested was taxed the year you received it, and every one added to your basis. Investors who report only the original purchase as basis overpay, sometimes by thousands. Brokers track this for most holdings, but not for shares bought before the reporting rules began in 2011 or moved between firms.
Inherited property steps up. Property you inherit takes a new basis equal to its value on the date of death. Stock your father bought for $5,000 and left you at a value of $50,000 has a $50,000 basis; sell it the next day and there is no gain. Jointly owned property between spouses steps up by half.
Gifts carry over. Property you receive as a gift keeps the giver’s basis. The same $5,000 stock given to you during your father’s life has a $5,000 basis in your hands, and the $45,000 gain is yours to pay tax on. For appreciated assets, inheriting usually beats receiving a gift, which is worth knowing before an aging parent signs over the house to save probate.
Worked example: the house, gifted or inherited
| Deeded to the child now | Left to the child at death | |
|---|---|---|
| Parent bought the house for | $120,000 | $120,000 |
| Worth when the child receives it | $520,000 | $520,000 |
| Child’s basis | $120,000 (carries over) | $520,000 (stepped up) |
| Child sells a year later for | $530,000 | $530,000 |
| Taxable gain | $410,000 | $10,000 |
| Federal tax at 15% plus Colorado 4.40% | about $79,500 | about $1,940 |
Rounded; assumes the child does not live in the house and the gain is in the 15% bracket. A parent who keeps the house and lets it pass at death also keeps a gift tax return off the table. The probate the gift was meant to avoid can usually be avoided another way; ask an attorney before the deed is signed.
Which shares did you sell? If you bought a stock at several prices, you can tell the broker which lot to sell. The default is first-in, first-out, which usually sells the oldest, cheapest shares and the biggest gain. The choice has to be made before the trade settles.
Losses, the $3,000 limit, and wash sales
Losses offset gains first. Short-term losses net against short-term gains, long-term against long-term, and then the two results net against each other.
Then $3,000 a year against other income. If losses exceed gains, up to $3,000 of the excess reduces wages, pension and other ordinary income each year. The rest carries forward to future years without expiring in your lifetime. A $30,000 loss with no gains to absorb it takes ten years to use up, or one year if there is a $27,000 gain to put it against.
The carryforward is easy to lose. It lives on a worksheet in last year’s return, not on any form the IRS sends you. When people change preparers it is often dropped. Bring last year’s complete return, every page.
Wash sales. You cannot sell a stock for a loss and buy it, or something substantially identical, back within 30 days before or after the sale and still claim the loss. The disallowed loss is added to the basis of the new shares, so it is deferred rather than gone. Reinvested dividends can trigger one by accident.
Behind the scenes
Brokers report wash sales within one account, not across accounts, and not when the repurchase happens in your IRA. A loss in a taxable account followed by the same fund bought in an IRA within 30 days is a wash sale the broker will not flag, and that loss is gone for good, since basis cannot be added to IRA shares. A preparer has to ask about every account in the household before finalizing Schedule D.
Special cases
Your home. Gain on the sale of a main home you owned and lived in for two of the last five years is excluded up to $250,000, or $500,000 on a joint return, and most sellers owe nothing. A surviving spouse keeps the $500,000 for a sale within two years of the death.
Rental property. Depreciation you took, or should have taken, is taxed at up to 25% when you sell, before the regular long-term rates apply to the rest of the gain. On a rental held twenty years it is often the largest part of the tax.
Collectibles. Coins, precious metals, art, antiques and some gold funds are taxed at a maximum 28% long-term rate instead of 15% or 20%.
Mutual fund distributions. A fund that sells winners inside the portfolio passes the gain to you as a distribution, usually in December. You owe tax on it whether you reinvested or not, even if the fund’s price fell that year.
Net investment income tax. The 3.8% surtax applies to the lesser of your net investment income or the amount your modified AGI exceeds $200,000 single or $250,000 joint. A one-time gain from selling a business or a rental can pull an ordinary family over those lines for a single year.
The Colorado side
No preferred rate here. Colorado starts from federal taxable income and applies its flat 4.40% to all of it. Long-term gains, short-term gains, dividends and wages are taxed alike, so a $20,000 gain taxed at 0% federally still costs $880 in Colorado. Losses, carryforwards and basis follow the federal figures. There is no separate Colorado capital gains schedule and no state version of the net investment income tax. The timing tricks that save federal tax, splitting a sale across two years, change nothing on the Colorado return except which year the $880 lands in.
What to bring your preparer
- Every Form 1099-B, including the supplemental pages that list each sale and its basis
- For any sale marked “basis not reported to IRS”: purchase confirmations, old statements, or the inheritance or gift paperwork that establishes basis
- Last year’s complete return, for the capital loss carryforward worksheet
- Date-of-death values for anything inherited, and the giver’s cost for anything received as a gift
- Closing statements for any real estate sold, plus a list of improvements with costs
- A note of any IRA or other-account purchases of a fund you sold at a loss within 30 days
- If you are thinking of selling something large before year end: what it is, roughly what the gain would be, and your other expected income, so the sale can be sized
Questions people ask
I sold stock and bought another the same day. Do I owe tax?
Yes, if the one you sold had a gain. Reinvesting does not defer anything outside a retirement account. Crypto works the same way.
My broker’s 1099-B shows “basis not reported to IRS.” What does that mean?
The broker is reporting the sale price but does not know your basis, usually because the shares were bought before the reporting rules or transferred in from elsewhere. You still get to use your real basis; you just have to prove it. Without proof the IRS treats the basis as zero and taxes the whole sale price.
Can I deduct a loss on my house or my car?
No. Losses on personal-use property are not deductible, even though gains on the same property are taxable.
I’m retired. Should I sell before year end or after?
It depends on how much room is left under the 0% line this year compared with next, and on what the gain does to your Social Security and Medicare figures. It is a short calculation, and it only works before December 31.
Do I pay the 3.8% tax on the sale of my business?
Often, yes, for the year of the sale. Gain from a business you actively ran is generally exempt from the surtax, but gain on investment assets inside it, and the income spike itself, can trigger it. It is one of the things to settle before the sale closes.
Figure the tax before the sale, not after
The year a gain lands in is the one thing about it that can still be changed, and only before December 31. If you are planning to sell something large, that is a fall conversation with whoever prepares your return.