There Is a 0% Capital Gains Bracket. The Numbers to Watch Are the Frozen Ones.

Capital gains tax has two kinds of number in it, and almost every explainer only covers one.

The first kind gets re-indexed for inflation every year. The 0%, 15% and 20% brackets move up a little each January, quietly, so that a raise that only matched inflation does not push you into a higher band. That is the system working as intended.

The second kind never moves. The threshold for the extra 3.8% investment surtax has sat at $200,000 since 2013. The cap on deducting investment losses against your salary has been $3,000 since 1978. Neither is indexed, so every year inflation drags more people over one and shrinks the real value of the other, without anyone voting on anything.

The Rates, and the One-Year Line

Hold an asset more than a year and the gain is long-term, taxed at 0%, 15% or 20% by taxable income. For 2026 the 0% band runs to $49,450 for single filers and $98,900 for married filing jointly, 15% to $545,500 and $613,700 respectively, and 20% above that.^[1]

Hold it a year or less and the gain is short-term, taxed as ordinary income at up to 37%.^[1]

That is the whole ballgame for most people. The difference between selling at eleven months and thirteen months can be twenty percentage points on the same gain, which is a larger effect than nearly any clever strategy layered on top. If a position is close to the line and nothing is wrong with it, the calendar is worth more than the analysis.

The 0% Bracket Is Real, and Almost Nobody Uses It

People treat the 0% band as a rounding error for the very poor. It is not, because of a detail in how it is measured: it is based on taxable income, which is after deductions, and it includes the gain itself.

So the people who can reach it are not only the low-paid. They are people having a low income year: a sabbatical, a stretch between jobs, a first year of a business that has not turned over yet, early retirement before pensions and Social Security begin. In those years there is room under the ceiling, and gains realised into that room are taxed at nothing.

That asymmetry is the mechanic that makes this usable. Everyone knows about harvesting losses, where the rule bites and where it can destroy a deduction outright rather than merely delay it; the mirror image is harvesting gains. Sell enough of an appreciated holding to fill the 0% band, pay no federal tax on it, and buy the position straight back. Your cost basis resets higher, so a future sale at a higher rate has less gain to tax, and you never left the market.

The rate is 0% only up to the ceiling, and a gain that pushes taxable income past it is taxed at 15% on the excess, so the size of the sale is the whole decision. And state tax usually does not follow the federal 0% rate, which is a real cost this move ignores.

The Two Numbers That Never Move

The 3.8% surtax, frozen since 2013. Once modified adjusted gross income clears $200,000 single or $250,000 married filing jointly, investment income picks up an extra 3.8%.^[2] It stacks, so a filer in the 20% bracket who is also over the threshold is paying an effective 23.8%.

Those thresholds were written into statute in 2013 and have never been adjusted for inflation, unlike the ordinary brackets the IRS re-indexes every year. Congressional Research Service analysis attributes part of the growth in both the revenue this tax raises and the number of people paying it to precisely that.^[3] A $200,000 income in 2013 was a different thing from a $200,000 income now. The tax did not change. The population it reaches did.

The $3,000 loss cap, frozen since 1978. Losses offset gains without limit. Beyond that you may deduct up to $3,000 of net loss against ordinary income per year, $1,500 if married filing separately, with the remainder carried forward indefinitely.^[4]

That figure has been fixed in statute since 1978. Indexed to inflation it would be somewhere around $13,000.^[4] Which means an investor with a $60,000 loss is looking at twenty years of carryforward to use it, on a provision that was originally sized to be roughly four times more generous in real terms.

Cost Basis: The Setting You Choose Once

If you have bought the same holding repeatedly, which anyone dollar-cost averaging has, then selling part of it raises the question of which shares you sold. That is the cost basis method, and most brokers default to first in, first out.

FIFO sells your oldest shares first. Those are usually your cheapest, so it tends to realise the largest gain. Specific identification lets you nominate which lots to sell, so you can pick high-basis shares to minimise the gain, or deliberately pick low-basis ones when you are filling the 0% band on purpose.

This has to be set before or at the time of sale, not at tax time. It is a setting in your brokerage account that takes two minutes and most people have never opened. Over a long holding period it is worth more than most of the fund-selection decisions people agonise over, which is also true of expense ratios.

What Actually Matters

Cross the one-year line. Twenty points, for waiting. Nothing else in this article competes with it.

Know which years are your low-income years. They are the ones where the 0% band and Roth conversions are both cheap, and they are usually visible in advance.

Put the tax-inefficient things in tax-sheltered accounts. Capital gains treatment only matters in a taxable account. The structural differences that drive this are in mutual funds versus ETFs, where the wrapper decides whether you get handed a distribution you never asked for. The same logic applies to dividends, which use these identical brackets but are taxed in the year they are paid rather than in a year you chose.

Do not let the tax decide the position. Refusing to sell a concentrated holding because of the gain is how people ride something all the way back down, having successfully avoided the tax on a profit that no longer exists. The tax is a percentage of the gain. The risk is all of it. That trade-off is the subject of diversification.

If your gains arrive as equity compensation rather than as investments you chose, the tax runs on a different track and the traps are different: how RSUs actually get taxed covers the withholding gap and the cost-basis error that causes people to pay twice.