Do Capital Gains Count as Income? Tax Definition and Examples

Capital gains count as taxable income and can affect your tax bracket, deductions and rates. They are taxed as short-term or long-term gains depending on how long you owned the asset and your total income. Short-term gains are taxed at regular income rates, while long-term gains often have lower rates.

A financial advisor can help you plan sales and use strategies to lower taxes while keeping your investments on track.

What Exactly Are Capital Gains?

A capital gain occurs when you sell a capital asset for more than your basis, which may differ from the purchase price. Assets can include stocks, bonds, real estate or collectibles.

For example, if you buy company stock for $1,000 and pay a $100 commission that is included in the stock’s basis, your basis is $1,100. Selling it for $1,500 would result in a $400 capital gain. On the other hand, you realize a capital loss if you sell assets for less than your basis.

You must record these gains and losses and report them to the IRS using Form 8949 and Schedule D.

Do Capital Gains Count as Income?

Capital gains do count as income and are a part of your adjusted gross income (AGI). The tax rate depends on the type of capital gains:

• Short‑term gains apply to assets sold within one year of purchase. They use ordinary income tax, applying standard federal brackets ranging from 10% to 37%.
• Long‑term gains apply to assets held over a year before they’re sold. They receive more favorable tax treatment at 0%, 15% or 20% rates, depending on your taxable income.

Capital Gains Tax Rates for 2026

These are the 2026 long-term capital gains thresholds.

Short-term gains are subject to ordinary income tax rates up to 37%. In addition, high-income individuals may pay a further 3.8% net investment income tax (NIIT) on net gains. For individuals, the tax applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 for single and head-of-household filers, $250,000 for married couples filing jointly and qualifying surviving spouses and $125,000 for married couples filing separately.

How Capital Gains Affect AGI and Other Taxes

Capital gains can affect more than just your gain-related tax liability. Since they are included in AGI, your gains can impact your eligibility for tax breaks, Medicare premiums and retirement phaseouts.

The 3.8% NIIT may apply when capital gains increase your modified adjusted gross income above the applicable threshold.

Reporting Capital Gains and Losses

When you sell assets like securities, your broker issues a 1099-B showing proceeds and cost basis for covered securities. You must report this on Form 8949, then summarize gains/losses on Schedule D. If your losses exceed gains, you can deduct up to $3,000 against ordinary income annually and carry over the remainder. 

Be careful of wash-sale rules, which can disallow a loss if you acquire substantially identical stock or securities within 30 days before or after the sale.

Special Exclusions and Exceptions

Certain capital gains receive more favorable treatment under tax law. For example, say you sell your primary residence. You may exclude up to $250,000 of gain if single or up to $500,000 if married filing jointly. However, you must meet the IRS ownership and use tests.

Another exception applies to qualified small business stock (QSBS). For eligible Section 1202 stock acquired after July 4, 2025, the exclusion can equal 50% of eligible gain after a three-year holding period, 75% after four years and 100% after five years. The per-issuer dollar limit for eligible stock acquired after that date is $15 million for 2026, subject to the alternative limit and other Section 1202 requirements. Different rules can apply to stock acquired on or before July 4, 2025.

Other gains may receive different, and potentially higher, tax rates. Gains on collectibles, including art or precious metals, may be taxed at a maximum 28% rate when held for more than one year. The portion of gain from certain depreciable real property treated as unrecaptured Section 1250 gain may be taxed at a maximum 25% rate.

Strategies to Reduce Capital Gains Taxes

There are several effective strategies to help minimize capital gains taxes.

• You can hold assets for over a year to qualify for long-term capital gains rates of 0 to 20%. These rates are generally lower than ordinary income rates.
• You can harvest losses by selling underperforming investments to offset gains, potentially lowering your taxable income for the year.
• Using tax-advantaged accounts, such as IRAs or 401(k)s, can defer taxes on investment gains or, in the case of qualified Roth distributions, allow earnings to be withdrawn tax-free.
• You could time your sales strategically. This is especially important during years with lower income. It allows you to potentially benefit from the 0% long-term capital gains rate.

Bottom Line

Capital gains do count as income and are a part of your AGI. The tax you owe depends on several factors. These include how long you held the asset, your total income and any applicable exclusions or exceptions. Make sure you understand reporting requirements, bracket thresholds and strategies to reduce your overall tax burden.

Tax Planning Tips 

• A financial advisor can help you minimize your tax liability for your portfolio. Finding a financial advisor doesn’t have to be hard. 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 you feel 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 want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.

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