Long-term capital gains tax: the holding period, the math and the rates

What is long-term capital gains tax?

Long term capital gains tax is the tax on a profit from selling a capital asset you held for more than one year. Instead of your ordinary income tax rate, the gain gets a rate of 0%, 15% or 20%, set by your taxable income and filing status (IRS Tax Topic 409).

The lower rate is the whole reason the holding period matters. A single filer in the 24% bracket who sells after 13 months typically pays 15% on the gain; the same sale after 11 months would be taxed at 24%. This page explains how the clock works, how the gain is measured and how the rates are applied. For the full list of dollar thresholds, see the 2026 capital gains tax rate page.

How long do I need to hold an asset for long-term capital gains?

You must hold the asset more than one year. The IRS counts the holding period from the day after you acquired the asset up to and including the day you sold it (IRS Tax Topic 409). Holding for exactly one year is not enough.

For stocks and funds, use the trade date, not the settlement date, for both the purchase and the sale. Your Form 1099-B shows the date acquired and date sold for each lot, and brokers split the lots into short-term and long-term sections.

Holding period exceptions

• Inherited property is treated as long-term even if you sell it days after receiving it (IRS Publication 550).
• Gifts generally keep the donor's holding period, so shares a parent held for five years are long-term for you from day one.
• Reinvested dividends buy new shares with their own purchase dates, so a fund you have owned for years can contain some short-term lots.

How is a long-term capital gain calculated?

Your gain equals the amount realized minus your adjusted basis. The amount realized is the sale price minus selling costs such as commissions. Basis is usually what you paid plus purchase costs, adjusted for items like reinvested dividends and return-of-capital distributions.

Worked example

1. Purchase: 100 shares at $40 plus a $5 fee, for a basis of $4,005.
2. Sale: 100 shares at $100 minus a $5 fee, for an amount realized of $9,995.
3. Gain: $9,995 minus $4,005 = $5,990.
4. Holding period: bought April 7, 2023, sold May 12, 2026, so the gain is long-term.
5. Rate: taken from the long term capital gains tax brackets for the year of sale based on total taxable income.

Long-term gains and losses are netted against each other first, then combined with short-term results on Schedule D (Form 1040). Only a net long-term gain that exceeds any net short-term loss gets the preferential rates.

Long term capital gains tax brackets: how the rate is applied

The rate is applied in layers. Ordinary income fills the bottom of your taxable income, and long-term gains sit on top. Each part of the gain is taxed at the rate for the band it lands in, which is why one sale can be taxed partly at 0% and partly at 15%.

Tax software does this layering with the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions. If you have 28% or 25% gain, the longer Schedule D Tax Worksheet is used instead.

Is the 0% long-term capital gains rate real?

Yes. Any long-term gain that fits under the 0% ceiling is taxed at zero federal income tax, and it is common among retirees and people between jobs. In 2026 the ceiling is $98,900 of taxable income for a married couple filing jointly.

Example: a retired couple has $50,000 of taxable income from a pension and IRA withdrawals after their deductions. They sell a fund held ten years for a $40,000 long-term gain. Total taxable income is $90,000, below $98,900, so the whole $40,000 gain is taxed at 0%.

When do the special 25% and 28% rates apply?

Two kinds of long-term gain have their own maximum rates, set out in IRS Tax Topic 409. They are maximums: if your ordinary bracket is lower, the lower rate applies.

• 28% maximum: gains on collectibles such as art, antiques, stamps, coins and precious metals, and the taxable part of gain on qualified small business stock under section 1202.
• 25% maximum: unrecaptured section 1250 gain, which is the part of a gain on depreciable real estate, such as a rental house, that reflects depreciation you claimed or could have claimed.

Example: you sell a rental property held eight years for a $90,000 gain, and you claimed $30,000 of depreciation. Up to $30,000 of the gain is unrecaptured section 1250 gain taxed at no more than 25%, and the other $60,000 uses the normal 0%, 15% or 20% bands.

How to plan the sale date

The sale date decides both the holding period and the tax year. A few days or a few weeks can change the rate on the whole gain.

1. Check the acquisition date for each lot in your brokerage account before selling; different lots of the same fund can have different dates.
2. If a lot is a few weeks short of the one-year mark, compare the tax saved by waiting with the market risk of holding longer.
3. If you expect lower income next year, such as the first year of retirement, a sale on January 2 instead of December 31 moves the gain into that lower-income year.
4. Pair gains with losses from the same year to reduce the net gain; the rules for losses and the $3,000 limit are in the capital gains tax guide.
5. If the gain is large, plan estimated payments; the IRS generally expects them when you will owe $1,000 or more at filing (IRS Publication 505).

Sales held one year or less follow the ordinary-rate rules explained on the short-term capital gains tax page. Qualified dividends share the same brackets, as the qualified dividends tax rate page shows.