Short answer: Capital gains tax is the tax you may owe when you sell an investment or other asset for more than you paid for it. You are taxed on the gain (the profit), not on the full sale price, and usually only when you sell. In the US, assets held for more than one year get special long-term rates of 0%, 15% or 20%, while short-term gains are taxed like wages. In the UK, gains above a £3,000 annual allowance are taxed at 18% or 24%, depending on your income.
This article is for general education only and is not financial, legal or tax advice. Tax rules change and depend on your full circumstances. Check the official sources linked below or speak to a qualified tax professional before acting.
What Is a Capital Gain?
The IRS explains in Topic no. 409, Capital gains and losses that almost everything you own for personal or investment use is a “capital asset”: shares, bonds, mutual funds, your home, even household furnishings. When you sell one, the difference between your adjusted basis (generally what you paid, plus certain costs) and the amount you receive is a capital gain or a capital loss.
A simple formula covers most cases:
- Sale proceeds (what you received, minus selling costs such as commissions)
- minus cost basis (what you paid, including buying costs)
- equals your capital gain or loss
Two points trip people up. There is usually no tax while you simply hold an asset that has risen in value; the gain is “realized” when you sell, swap or otherwise dispose of it. Also, the rules for inherited or gifted assets are different: for inherited property, the IRS generally uses the value on the date of death as your basis, as explained in Publication 551, Basis of Assets.
Short-Term vs Long-Term Capital Gains (US)
In the US, how long you held the asset matters as much as how much you made. According to the IRS, if you hold an asset for more than one year before selling, the gain is long-term. If you hold it one year or less, it is short-term. You count from the day after you acquired the asset up to and including the day you sell it.
Short-term gains are taxed as ordinary income at your regular bracket rates. Long-term gains get lower rates. If you are unsure how ordinary brackets stack, our explainer on how tax brackets work walks through marginal vs effective rates.
2026 long-term capital gains rates
The thresholds below come from IRS Revenue Procedure 2025-32, which sets the inflation-adjusted figures for tax years beginning in 2026. They are based on your total taxable income (after deductions), not just the gain.
| Filing status (2026) | 0% rate up to | 15% rate up to | 20% rate above |
|---|---|---|---|
| Single | $49,450 | $545,500 | $545,500 |
| Married filing jointly | $98,900 | $613,700 | $613,700 |
| Head of household | $66,200 | $579,600 | $579,600 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
Some gains are taxed at higher maximum rates. The IRS lists a 28% maximum rate for collectibles such as coins or art and for the taxable part of qualified small business stock gains, and a 25% maximum for unrecaptured section 1250 gain on certain real estate.
The extra 3.8% net investment income tax
Higher earners may also pay the net investment income tax (NIIT): 3.8% on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single or head of household), $250,000 (married filing jointly) or $125,000 (married filing separately). Capital gains count as investment income for this purpose. Many states also tax capital gains, so check your state’s rules too.
A Worked US Example
Here is a simplified, hypothetical example for a single filer in 2026, using the brackets and thresholds from Rev. Proc. 2025-32:
- Taxable income from a salary, after the standard deduction: $40,000
- Gain from selling index fund shares: $15,000
- Total taxable income: $55,000
If the shares were held for more than one year: long-term gains sit “on top” of ordinary income. The first $9,450 of the gain fills the space up to the $49,450 threshold and is taxed at 0%. The remaining $5,550 is taxed at 15%, or $832.50.
If the shares were held for one year or less: the whole $15,000 is taxed as ordinary income. In 2026 the 12% bracket for single filers runs to $50,400, so $10,400 of the gain is taxed at 12% ($1,248) and the last $4,600 falls in the 22% bracket ($1,012), for roughly $2,260.
Waiting past the one-year mark cuts the federal tax on that gain by more than half in this example. Treat this as an illustration only.
Capital Losses and the Wash Sale Rule
Losses can work in your favor. Capital losses first offset capital gains. If your losses are larger than your gains, the IRS lets you deduct up to $3,000 of the excess against other income each year ($1,500 if married filing separately), and carry any remaining loss forward to future years.
Watch out for the wash sale rule. IRS Publication 550 says you cannot deduct a loss on stock or securities if, within 30 days before or after the sale, you buy substantially identical securities, including buying them in your IRA or Roth IRA. A disallowed loss is generally added to the basis of the new shares rather than lost for good, but it delays the tax benefit. Losses on personal-use property, such as your own car or home, are not deductible at all.
Selling Your Home
In the US, IRS Topic no. 701 explains that you may exclude up to $250,000 of gain on your main home, or up to $500,000 on a joint return, if you meet the ownership and use tests: generally owning the home and living in it as your residence for at least two years out of the five years before the sale. You still need to report the sale if you receive Form 1099-S or cannot exclude all of the gain.
In the UK, Private Residence Relief usually means no Capital Gains Tax when you sell your only home, provided you have lived in it as your main home the whole time, have not let part of it out (a lodger does not count), have not used part of it exclusively for business, the grounds are under 5,000 square metres and you did not buy it just to make a gain.
How Capital Gains Tax Works in the UK
HMRC’s guide on what you pay Capital Gains Tax on lists the main “chargeable assets”: most personal possessions worth £6,000 or more (apart from your car), property that is not your main home, shares that are not in an ISA or PEP, business assets and cryptoassets. Gains on ISAs, UK government gilts and Premium Bonds are exempt, and gifts to your spouse, civil partner or a charity are usually free of the tax.
The allowance and the 2026/27 rates
Everyone has an annual tax-free allowance (the Annual Exempt Amount) of £3,000. According to the GOV.UK rates page, for gains made from 6 April 2026:
- Gains that fall within your unused basic rate band are taxed at 18%.
- Gains above the basic rate band, and all gains for higher and additional rate taxpayers, are taxed at 24%.
- Gains that qualify for Business Asset Disposal Relief are taxed at 18%.
GOV.UK gives this example: with taxable income of £20,000 and taxable gains of £12,600, you deduct the £3,000 allowance, leaving £9,600. Because £20,000 plus £9,600 is below the £37,700 basic rate band for 2026/27, the whole amount is taxed at 18%, a bill of £1,728.
The simplest way for many UK investors to avoid Capital Gains Tax is to hold shares and funds inside a stocks and shares ISA. Our guide to what an ISA is explains the £20,000 annual allowance and the different ISA types.
Losses and reporting in the UK
HMRC lets you deduct allowable losses from gains in the same tax year and carry unused losses forward. You can claim a loss up to four years after the end of the tax year in which you disposed of the asset. Note that the UK has its own 30-day rule: if you buy back the same shares within 30 days of selling, special matching rules apply to the cost you use.
You do not get a bill: you must report and pay yourself. Gains on UK residential property must be reported and paid within 60 days of completion. Other gains are reported through a Self Assessment tax return, or, if you are eligible, the “real time” Capital Gains Tax service by 31 December after the tax year of the sale. If you are registered for Self Assessment, you must report sales where the total proceeds exceeded £50,000, even when your gains are under the allowance.
Practical Ways to Reduce Capital Gains Tax (Legally)
- Use tax-advantaged accounts. Gains inside a 401(k), traditional IRA or Roth IRA in the US, or an ISA or pension in the UK, are not taxed when you sell within the account. See our guide on how a 401(k) works.
- Mind the calendar. In the US, holding for more than one year can move a gain from ordinary rates to long-term rates. In the UK, spreading sales across tax years lets you use more than one £3,000 allowance.
- Offset gains with losses, while respecting the US wash sale rule and UK share matching rules.
- Keep good records of purchase prices, reinvested dividends, fees and improvement costs, all of which can affect your basis.
- Plan estimated payments. A large US gain can mean you need to make estimated tax payments to avoid penalties.
Frequently Asked Questions
Do I pay capital gains tax if I don’t sell?
Generally no. In both the US and the UK, the tax is triggered when you sell or otherwise dispose of an asset, not while its value rises on paper. Dividends and interest you receive, however, can be taxable each year.
Is capital gains tax charged on the whole sale price?
No. You are taxed on the gain: the sale proceeds minus your cost basis and allowable costs. Selling $10,000 of shares you bought for $8,000 creates a $2,000 gain, not a $10,000 one.
Can capital gains push me into a higher tax bracket?
In the US, long-term gains are added to your taxable income to decide which capital gains rate applies, and short-term gains are taxed as ordinary income. In the UK, gains are added to your taxable income to decide how much is taxed at 18% and how much at 24%.
Do I pay capital gains tax on funds in a 401(k), IRA or ISA?
Not on sales inside those accounts. US retirement withdrawals follow their own rules; ISA gains are free of UK tax.
What happens if I make a loss?
In the US, net losses offset gains and up to $3,000 a year of other income, with the rest carried forward. In the UK, reported losses reduce your gains and unused losses can be carried forward.
The Bottom Line
Capital gains tax is a tax on profit, not on sales. In the US, the biggest lever is time: holding for more than a year can reduce the rate to 0%, 15% or 20%. In the UK, the £3,000 allowance, the 18% and 24% rates and the ISA wrapper do most of the work. Keep careful records, use tax-advantaged accounts where they fit, and check the official IRS or HMRC guidance, or a qualified adviser, before a large sale.
