Capital Gains Tax on Stocks — How It Works (2026)

What Is Capital Gains Tax?

Capital gains tax applies when you sell an investment for more than you paid for it. In the US, the rate depends on how long you held the asset:

• Short-term (held less than 1 year) — taxed at your ordinary income rate (10%–37%)
• Long-term (held 1 year or more) — taxed at 0%, 15%, or 20% depending on income

The distinction between short-term and long-term is one of the most important concepts in investment tax planning.

Who Needs to Report Capital Gains?

You need to report capital gains if in the tax year you:

• Sold stocks, ETFs, or mutual funds at a gain or loss
• Sold shares in a private company
• Received a 1099-B from your brokerage

Important: Report even if you had a loss. Declaring losses lets you deduct them against gains and carry them forward.

Filing Deadline

April 15, 2026 (for tax year 2025) — same as your regular income tax return. Capital gains are reported as part of your overall return, not on a separate filing.

How to Report Capital Gains Step by Step

Step 1: Collect Your 1099-B

Your broker must send a 1099-B by February 15. It includes:

• Proceeds from each sale
• Cost basis (purchase price + commissions)
• Whether each gain is short-term or long-term

If you have accounts at multiple brokers, you'll receive multiple 1099-Bs — combine them all.

Step 2: Review in Your Tax Software

Most tax software imports 1099-B data directly. Verify that the amounts match your records, especially for:

• Shares purchased years ago (cost basis may be missing)
• Reinvested dividends (they increase your cost basis)
• Corporate actions (splits, mergers)

Step 3: Apply Losses from Prior Years

If you reported losses in previous years, you can offset this year's gains. Rules:

• Losses carry forward indefinitely
• Short-term losses offset short-term gains first, then long-term
• Net losses up to $3,000/year offset ordinary income

Step 4: Calculate Your Tax

Short-term gains: Taxed at your ordinary rate (10%–37%)

Long-term gains rates for 2026 (single filer):

• 0% — taxable income up to ~$47,025
• 15% — taxable income $47,026 to ~$518,900
• 20% — taxable income above $518,900

Plus: 3.8% Net Investment Income Tax (NIIT) if AGI exceeds $200,000 single / $250,000 married

Step 5: File Your Return

Complete Form 8949 (transaction details) and Schedule D (summary), then submit with your 1040.

What Counts as Cost Basis?

Your cost basis includes:

• Purchase price of the shares
• Commissions — at both buy and sell (though most brokers are now commission-free)
• Account fees tied to specific investments
• Currency conversion costs — for international stock purchases
• Reinvested dividends — these increase your basis

International Stocks — How to Report

If you invest through a US-based broker (Fidelity, Schwab, Vanguard), your 1099-B will include international transactions with amounts already converted to USD.

If you use a foreign broker (Interactive Brokers non-US entity, etc.):

• You may not receive a 1099-B
• You must calculate gains yourself in USD
• Convert using the exchange rate on the date of each transaction
• Report on Form 8949 and Schedule D

Dividends and Capital Gains

Dividends are reported separately from capital gains:

• Qualified dividends — taxed at long-term capital gains rates (0/15/20%)
• Ordinary dividends — taxed at your ordinary income rate
• Reported on 1099-DIV, not 1099-B
• You don't need to do anything special — your broker reports them

Exception: Foreign dividends may require Form 1116 to claim a Foreign Tax Credit for taxes withheld abroad.

Common Mistakes

1. Not reporting losses — you lose the ability to carry them forward
2. Ignoring cost basis adjustments — reinvested dividends, stock splits, wash sales
3. Wrong holding period — short-term vs. long-term makes a huge difference in tax rate
4. Missing 1099-Bs — check all brokerage accounts
5. Not applying prior-year losses — review past returns for carryforward amounts

FIFO — Default Cost Basis Method

When calculating gains, the default method is FIFO (First In, First Out) — the shares you bought first are considered sold first. This matters when you bought the same stock at different prices.

Alternative: Specific identification lets you choose which shares to sell, potentially minimizing gains. You must designate the shares at the time of sale.

How to Minimize Capital Gains Tax

• Hold for over a year — long-term rates (0–20%) beat short-term rates (10–37%)
• Harvest losses — sell losers to offset winners (tax-loss harvesting)
• Use tax-advantaged accounts — Roth IRA (tax-free), 401(k) (tax-deferred)
• Donate appreciated stock — avoid capital gains and get a charitable deduction
• Mind the 0% bracket — if your income is low enough, long-term gains may be tax-free
• Track your cost basis — every dollar of basis reduces your taxable gain

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