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It’s nice to see the total value of your investments growing over time, but any significant growth also opens up the possibility of moving into a higher tax bracket. In fact, this is one way that many people end up owing a lot more tax than they anticipated. While long-term capital gains can’t push you into a higher tax bracket, short-term capital gains can. Understanding how capital gains work could help you avoid unintended tax consequences.
If you’re seeing significant growth in your investments, you may want to consult a financial advisor.
How Tax Brackets Work
Federal and state tax brackets determine the tax rate you pay on different portions of your taxable income. Think of them like a series of fiscal steps: The more you earn, the higher you climb; and consequently, the higher the tax rate you pay.
There are seven federal tax brackets, each with a maximum tax rate that corresponds to your income and filing status. Here are the income thresholds for the 2026 tax year:
| Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $12,400 | $0 – $24,800 | $0 – $12,400 | $0 – $17,700 |
| 12% | $12,400 – $50,400 | $24,800 – $100,800 | $12,400 – $50,400 | $17,700 – $67,450 |
| 22% | $50,400 – $105,700 | $100,800 – $211,400 | $50,400 – $105,700 | $67,450 – $105,700 |
| 24% | $105,700 – $201,775 | $211,400 – $403,550 | $105,700 – $201,775 | $105,700 – $201,750 |
| 32% | $201,775 – $256,225 | $403,550 – $512,450 | $201,775 – $256,225 | $201,750 – $256,200 |
| 35% | $256,225 – $640,600 | $512,450 – $768,700 | $256,225 – $384,350 | $256,200 – $640,600 |
| 37% | $609,351+ | $768,700+ | $384,350+ | $640,600+ |
Your marginal tax reflects the highest tax rate you pay on the last dollar of income. Your effective tax rate, meanwhile, is the average tax rate that applies to all of the income you earn. In a progressive tax system, your effective tax rate is typically lower than your marginal rate, as it accounts for income in lower tax brackets.
Understanding where you land in the tax bracket range is important for estimating your tax liability. It can also make a difference in how much you’ll owe if you’re including capital gains in your taxable income calculations.
What Qualifies as a Capital Gain?
Capital gains are the net increase of your investments. In other words, it is what you make above what you spend to purchase that investment. For example, suppose you purchased a stock for $50 and sold it later for $100. The additional $50 you earned is your capital gain.
These gains, profits from your investments or sale of assets like stocks, bonds or property, come under the purview of the capital gains tax. The IRS applies the capital gains tax based on how long you hold an investment before selling it:
- Long-term capital gains tax applies to investments held longer than one year.
- Short-term capital gains tax applies to investments held for less than one year.
A capital loss occurs when you sell an investment for less than what you paid for it. It’s possible to use capital losses to offset taxes owed on capital gains through a process called tax loss harvesting.
Do Capital Gains Count as Income?
Capital gains are generally counted as taxable income in the eyes of the IRS. The rate at which they’re taxed is determined by whether you’re reporting a short- or long-term capital gain.
Short-term capital gains are taxed as ordinary income, according to your tax bracket. Long-term capital gains are taxed at 0%, 15% or 20%, depending on your income and filing status.
Here are the long-term capital gains tax income thresholds for 2026:
| Tax Rate | Single Filers | Married Couples Filing Jointly | Heads of Household |
|---|---|---|---|
| 0% | $49,450 | $98,900 | $66,200 |
| 15% | $49,451 and $545,500 | $98,901 and $613,700 | $66,201 and $579,600 |
| 20% | $545,501+ | $613,701+ | $579,601+ |
What Is the Capital Gains Bump Zone?
The capital gains bump zone refers to the range of income where a substantial short-term capital gain could tip you into a higher tax bracket, and therefore increase your tax rate.
For example, if you’re in the 22% tax bracket and a $10,000 short-term capital gain inflates your income to enter the 24% tax bracket, you’ll end up paying a higher tax rate on the portion of income in the 24% bracket. A clear understanding of this dynamic can help you anticipate and prevent potential tax pitfalls.
Knowing how capital gains interact with your tax bracket can help you make more informed decisions about when to sell investments. You can use our income tax calculator to estimate how a potential gain could affect your marginal tax rate and overall tax liability before you finalize a transaction:
Income Tax Calculator
Calculate your federal, state and local taxes for the 2025 tax year.
Your 2025 Total Income Taxes
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About This Calculator
Our income tax calculator calculates your federal, state and local taxes based on several key inputs: your household income, location, filing status and number of personal exemptions.
How Income Taxes Are Calculated
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First, we calculate your adjusted gross income (AGI) by taking your total household income and reducing it by certain items such as contributions to your 401(k).
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Next, from AGI we subtract exemptions and deductions (either itemized or standard) to get your taxable income. Exemptions can be claimed for each taxpayer.
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Based on your filing status, your taxable income is then applied to the tax brackets to calculate your federal income taxes owed for the year.
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Your location will determine whether you owe local and / or state taxes.
When Do We Update? - We check for any updates to the latest tax rates and regulations annually.
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Assumptions
Deductions
- "Other Pre-Tax Deductions" are not used to calculate state taxable income.
Credits
- The only federal credit automatically calculated is the Savers Credit, depending on your eligibility.
- We do not apply any refundable credits, like the Child Tax Credit or Earned Income Tax Credit (EITC).
- We do not apply state credits in our calculations.
Itemized Deductions
- If itemizing at the federal level, you may need to itemize at the state level too. Some states don't allow itemized deductions, which is accounted for in our calculations.
- When calculating the SALT deduction for itemized deductions, we use state and local taxes, and we assume your MAGI.
- We assume that there is no cap to itemized deductions, if a state allows them.
- We do not categorize itemized deductions (such as medical expenses or mortgage interest), which could be subject to specific caps per state.
Local Tax
- Depending on the state, we calculate local taxes at the city level or county level. We do not include local taxes on school districts, metro areas or combine county and city taxes.
- With the exception of NYC, Yonkers, and Portland/Multnomah County, we assume local taxes are a flat tax on either state taxable income or gross income.
Actual results may vary based on individual circumstances and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee income tax amounts or rates. Past performance is not indicative of future results.
SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.
How Capital Gains Can Influence Other Parts of Your Tax Return
Realizing capital gains doesn’t just affect how much you pay in taxes on the gain itself. It can also increase your total income in a way that impacts other areas of your tax return, sometimes creating additional costs that aren’t immediately obvious. These ripple effects highlight the importance of reviewing how investment gains fit into your full tax picture. Planning the timing of sales and using tools like tax-loss harvesting can help reduce the impact on other parts of your return.
Social Security Taxation
If you’re collecting Social Security, adding capital gains, especially large short-term gains, can raise your income enough to make more of your benefits taxable. This happens when your total income, including half of your Social Security benefits, crosses certain IRS thresholds.
Medicare Premium Surcharges
Higher income can also trigger higher Medicare costs. Medicare uses your modified adjusted gross income (MAGI) from two years prior to determine whether you’ll pay more for Part B and Part D. If capital gains push your income above certain thresholds, you could face higher monthly premiums for a full calendar year.
Loss of Credits or Deductions
Some tax credits and deductions are phased out as income rises. If capital gains boost your income above a certain limit, you could lose access to credits like the retirement savings contributions credit or education-related tax benefits. In some cases, this could result in a higher overall tax bill than expected—even if your gains are long-term and taxed at a lower rate.
Additional Investment Tax
If your income is above certain limits, you may also owe an extra tax on investment income, commonly known as the Net Investment Income Tax (NIIT). This applies an extra 3.80% tax on capital gains and other investment income once you pass the income threshold ($200,000 for single filers, $250,000 for married couples filing jointly).
State Capital Gains Taxes
Federal taxes are only part of the picture. Most states also tax capital gains, and in many cases, these taxes can add a significant amount to what you owe.
How States Tax Capital Gains
The majority of states treat capital gains as ordinary income, which means your state income tax rate applies on top of whatever you pay at the federal level. For someone in a high-tax state like California (top rate of 13.30%), New York (top rate of 10.90%), or New Jersey (top rate of 10.75%), the combined federal and state rate on long-term capital gains can exceed 30%. That’s a meaningful difference from the 15% or 20% federal rate that most people focus on.
On the other end of the spectrum, several states have no income tax at all, which means no state tax on capital gains either. These include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. Washington state is worth noting separately: It has no general income tax, but it does impose a 7% tax on long-term capital gains above $278,000 for tax year 2025.
Some states also offer preferential treatment for certain types of gains. For example, several states exclude or reduce taxes on gains from the sale of a primary residence, gains from qualified small business stock or gains from in-state investments. These rules vary widely and change frequently, so it’s worth checking your state’s current rules before making any assumptions.
The Broader Impact of State Capital Gains Taxes
For the purposes of this article, state taxes matter because a short-term capital gain that pushes you into a higher federal bracket may simultaneously push you into a higher state bracket. That double hit can result in a much larger tax bill than you’d expect by looking at the federal tables alone. And when you add the 3.80% net investment income tax discussed above, the total effective rate on a large capital gain can approach or exceed 40% for high earners in high-tax states.
If you’re nearing a large asset sale or expecting a significant capital gain in a given year, factoring in your state tax rate is just as important as understanding where you fall in the federal brackets. For some investors, this is also a reason to consider the timing of a sale relative to a relocation, since moving to a no-income-tax state before selling appreciated assets can meaningfully reduce total tax exposure.
Tips for Lowering Your Capital Gains Tax
While lowering your capital gains tax may seem challenging, various strategies can help. Here are a few you may consider to potentially reduce your tax bill:
- Hold on to assets for longer than one year to lock in lower, long-term capital gains tax rates.
- Harvest losses to counterbalance gains in your taxable brokerage account.
- Hold less tax-efficient investments in a tax-advantaged vehicle, like a traditional or Roth IRA.
- Reduce your taxable income for the year by contributing to a 401(k) plan or similar tax-advantaged retirement plan at work.
Additionally, talking to a financial advisor can help you develop a customized tax strategy for managing capital gains efficiently.
Bottom Line
Capital gains can influence your overall tax picture, but they don’t automatically push all of your income into a higher tax bracket. While your gains may affect your taxable income and potentially expose more dollars to higher marginal rates, only the income that falls above each threshold is taxed at that higher level. Understanding how capital gains interact with your ordinary income can help you plan more effectively, time your sales strategically and minimize your overall tax burden.
Tips for Tax Planning
- Getting pushed into a higher tax bracket can feel devastating if you’re not prepared for it, especially if there were steps you could’ve taken to avoid it. A financial advisor who specializes in tax strategies can help you prepare for these situations and you manage your finances overall. Finding a financial advisor doesn’t have to be hard, either. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you anticipate receiving some capital gains this year, you can use SmartAsset’s free capital gains calculator to help you estimate how much you may owe.
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