Capital Gains Tax Explained: Short-Term vs. Long-Term Rates (2024 to 2026)

Investors spend most of their analysis on the way in: the entry price, the projected return, the exit multiple. The tax on the way out gets a fraction of that attention, even though it decides how much of a gain becomes capital you can deploy again. A $100,000 gain taxed at 37% leaves $63,000. The same gain taxed at 20% leaves $80,000. Nothing about the investment changed. Only the calendar did.

Capital gains tax is a cost you can plan, and the two levers that control it are when you sell and whether you need to sell at all. Most guides cover the first lever. Very few cover the second, which is where entrepreneurs, real estate investors, and high-income earners who deploy capital often lose the most, because every sale made to fund a new opportunity resets the compounding on the asset that was sold.

At BetterWealth, we have structured more than 2,000 whole life policies across all 50 states, and a recurring conversation with clients is the one that starts with "I need capital for a deal, and the only place it sits is in something I would have to sell."

Below are the 2024 federal rates (with 2025 and 2026 thresholds), the surtaxes and state taxes that raise the real rate, seven legal ways to cut the bill, and where our framework, The And Asset, fits when borrowing against a policy beats selling an appreciated asset, and when it does not.

Figures in this guide are for tax year 2024 unless labeled otherwise. The 2025 and 2026 tax years use higher, inflation-adjusted thresholds, shown alongside the 2024 table. This is education, not individual tax advice.

01 / The ProblemWhy the Tax on a Sale Decides What the Sale Actually Nets

The tax on a sale is a direct subtraction from the capital you walk away with, and it lands at the exact moment you are trying to redeploy that capital. An investor who sells $143,000 of stock to fund a property purchase does not have $143,000 to deploy. They have $143,000 minus the tax, and if the position was held eleven months instead of thirteen, that tax can be half again as large.

The second cost is quieter. The asset that was sold stops compounding for you. If it would have kept growing, the sale converted a compounding position into a one-time pile of after-tax cash. Economists call the forgone growth opportunity cost. Nelson Nash, who pioneered the idea of using whole life insurance as a personal banking system, built his whole argument on it: you either pay interest to someone else or you give up what your money would have earned.

Every sale has two prices. The tax is only the visible one.

02 / The BasicsWhat Are Capital Gains, and How Is Basis Calculated?

A capital gain is the profit you realize when you sell a capital asset for more than your basis. Basis is usually what you paid for the asset plus transaction costs such as commissions and closing costs, adjusted over time for items like depreciation on real estate or reinvested dividends in a brokerage account.

The common capital assets that produce gains are stocks, bonds, and funds held in taxable accounts, investment real estate, business interests, and collectibles such as art and antiques. A primary residence is a capital asset too, though a large exclusion often shelters its gain (covered below).

The reverse also applies. Sell an asset for less than its basis and you realize a capital loss. Losses first offset capital gains of any size. If losses exceed gains, up to $3,000 of the net loss offsets ordinary income each year, and the rest carries forward indefinitely.

One point trips people up: a gain is only taxed when it is realized. A stock that has tripled in value inside a taxable account owes nothing until you sell it. That single rule is the reason the "whether to sell" question exists at all.

03 / The Core RuleHow Are Short-Term and Long-Term Capital Gains Taxed Differently?

Short-term gains are taxed as ordinary income, and long-term gains are taxed at preferential rates. The dividing line is the holding period: one year or less is short-term, more than one year is long-term. The holding period generally starts the day after you acquire the asset and includes the day you sell it.

Short-Term Capital Gains

A short-term gain is added to your wages, business income, and other ordinary income and taxed at your marginal federal rate. In 2024 those rates ran from 10% to 37%. For married couples filing jointly, the 24% bracket covered taxable income from $201,051 to $383,900, and the 37% rate applied above $731,200. For single filers, 37% applied above $609,350.

Long-Term Capital Gains

A long-term gain is taxed at 0%, 15%, or 20%, and which rate applies depends on your total taxable income, including the gain itself. Most households with six-figure incomes land in the 15% band. The 20% rate is reserved for taxable income above $583,750 for joint filers in 2024.

A filer in the 37% ordinary bracket is also above the 20% long-term threshold, so the accurate comparison for a top-bracket filer is 37% versus 20%, which is $37,000 versus $20,000 of federal tax on the same $100,000 gain.

Waiting past the twelve-month mark can be worth $17,000.

04 / The RatesWhat Are the 2024 Long-Term Capital Gains Tax Rates?

For tax year 2024, the long-term capital gains rate is 0% up to $94,050 of taxable income for married couples filing jointly, 15% up to $583,750, and 20% above that. The IRS adjusts these thresholds for inflation every year. The figures below come from IRS Revenue Procedure 2023-34.

2025 and 2026 Thresholds

The rates stay at 0%, 15%, and 20%, but the income bands move up each year. These are the published thresholds for the following two tax years.

Sources: IRS Rev. Proc. 2024-40 (tax year 2025) and Rev. Proc. 2025-32 (tax year 2026).

Short-term gains in every year are taxed at the ordinary income brackets for that year, which run from 10% to 37%.

05 / The Real RateWhat Raises Your Effective Capital Gains Rate Above the Headline?

Three things raise the rate you actually pay above the 0%, 15%, or 20% headline: the net investment income tax, special rates on certain assets, and state income tax. An investor who plans around the headline rate alone will underestimate the bill.

The 3.8% Net Investment Income Tax

The net investment income tax adds 3.8% to capital gains, dividends, interest, and passive rental income once modified adjusted gross income passes $250,000 for married couples filing jointly or $200,000 for single filers. Those thresholds are set in the statute and are not indexed for inflation, so more households cross them every year. For a high earner, the top federal rate on most long-term gains is 23.8%, and the top rate on short-term gains is 40.8%.

Special Rates on Certain Gains

Not every long-term gain is capped at 20%. Gains on collectibles such as art, antiques, coins, and precious metals are taxed at a maximum of 28%. Unrecaptured Section 1250 gain, the portion of a real estate gain that comes from depreciation you previously deducted, is taxed at a maximum of 25%. Add the 3.8% surtax and those reach 31.8% and 28.8%. Real estate investors who have depreciated a property for a decade feel this one at sale.

State Capital Gains Taxes

Most states tax capital gains as ordinary income, with no preferential long-term rate. California's top rate is 13.3%, and New York's top rate is 10.9%. Pennsylvania taxes income at a flat 3.07% and Illinois at a flat 4.95%. Florida and Texas levy no state income tax. Washington has no tax on wages but imposes a separate tax on certain long-term capital gains above an annual exemption. Rates and exemptions change, so confirm the current figures with your state's department of revenue.

A California resident can lose more than 37% of a long-term gain.

06 / The PlaybookHow to Reduce Capital Gains Tax: Seven Legal Strategies

The legal ways to reduce capital gains tax come down to timing, offsetting, sheltering, and not selling. These seven strategies are the ones we see used most by entrepreneurs, real estate investors, and high-income earners, in the order most people should consider them.

1. Hold Past Twelve Months. The simplest move is to hold appreciated assets more than one year before selling. For a filer in the 32% ordinary bracket, that turns a 32% federal rate into 15%. Put the acquisition date on the calendar the day you buy.
2. Harvest Losses Against Gains. Sell positions trading below basis to offset gains realized the same year. Up to $3,000 of net loss offsets ordinary income, and the rest carries forward. The wash sale rule disallows the loss if you buy a substantially identical security within 30 days before or after the sale, so plan the replacement position carefully.
3. Use Tax-Advantaged Accounts. Trades inside a 401(k), traditional IRA, or Roth IRA do not trigger current capital gains tax. A health savings account adds a third layer: contributions are made pretax or deducted, growth is untaxed, and qualified medical withdrawals are tax-free. Keep high-turnover strategies inside these accounts where possible.
4. Give Appreciated Assets Instead of Cash. Donating long-held appreciated stock to a qualified charity generally avoids the gain and may allow a deduction at fair market value, subject to AGI limits and whether you itemize. Gifting appreciated assets to family members in lower brackets can also reduce the rate, but the recipient takes over your cost basis, and the kiddie tax can apply to many children and full-time students under 24. Verify both moves with a tax advisor before you make them.
5. Defer Real Estate Gains With a 1031 Exchange. Section 1031 lets you defer the gain on investment or business real property by exchanging it for like-kind real property. It applies only to real property. The replacement must be identified within 45 days and acquired within 180 days, and the deferred gain carries into the new property's basis.
6. Use the Exclusions the Code Provides. The primary residence exclusion shelters up to $250,000 of gain for a single filer or $500,000 for joint filers who owned and lived in the home two of the last five years. Section 1202 can exclude up to 100% of the gain on qualified small business stock held more than five years, subject to per-issuer caps and eligibility rules; legislation enacted in 2025 revised the holding periods and caps for newly issued stock, so confirm current rules with an advisor. Inherited assets generally receive a step-up in basis to fair market value at death.
7. Question Whether You Need to Sell. When the reason for a sale is to fund a new opportunity, compare the tax on the sale with the cost of borrowing against another asset. A sale is permanent. A loan is repaid. The rest of this guide covers when borrowing wins and when it does not.

Strategies one through six are standard tax planning, and any competent CPA will walk through them. Strategy seven is where capital strategy and tax strategy overlap, and it is the one we work on every week.

07 / The FrameworkWhere Does The And Asset Fit When You Need Capital Without Selling?

The And Asset fits when an investor needs capital for an opportunity and the alternative is selling an appreciated asset and paying the tax. It is BetterWealth's framework for using a properly structured whole life policy as a capital base you borrow against, while the cash value stays in the policy and continues to earn.

The tax mechanics are why it belongs in a capital gains discussion. Cash value growth inside a policy that meets the definition of life insurance under IRC Section 7702 is tax-deferred. A loan against that cash value is generally not taxable income as long as the policy stays in force and is not a modified endowment contract under Section 7702A. There is no sale, so there is no realized gain. If the policy lapses or is surrendered with a loan outstanding, the gain above your basis can become taxable, which is why loans have to be managed rather than ignored.

Where IBC Ends and The And Asset Begins

Nelson Nash laid the foundation in Becoming Your Own Banker, and we credit him for it. The And Asset shares roots with IBC but operates on different principles. IBC says use the policy as a personal bank for any purchase. The And Asset says only deploy capital when the borrowed dollars out-earn the carrier's loan cost, because anything less is an expensive way to spend money.

Many IBC marketers also say you are paying yourself interest when you repay a policy loan. You are not. The interest goes to the carrier. Your return is what the deployed capital earns elsewhere while the policy keeps compounding, net of mortality and expense charges.

The math has to work. Every time.

08 / The MathWhen Does Borrowing Beat Selling an Appreciated Asset?

Borrowing beats selling when the return on the deployed capital exceeds the loan rate by enough to cover the interest, and the asset you kept is worth more to you held than sold. The tax you defer by not selling is a bonus in that equation. It is never the reason on its own.

Policy loan rates vary by carrier and time period. At the time of writing, many carriers fall in the 5% to 6% range, but treat any specific number as a variable to verify with the carrier. Compare four figures: the tax a sale would trigger, the total interest on the loan over its repayment schedule, the return the deployed capital is projected to earn, and the growth the kept asset is likely to produce.

If the deployed return does not clear the loan rate, do not borrow. Sell, pay the tax, and deploy the net proceeds, or pass on the deal.

Tax is the tiebreaker, never the reason.

09 / The MistakesWhere Do Investors Get Capital Gains Wrong?

Investors most often get capital gains wrong by treating all gains as taxed the same, by assuming any gain can be deferred indefinitely, and by ignoring the tax drag of frequent small trades. Each one costs real money.

"All gains are taxed equally" is the first. The gap between a short-term and long-term rate for the same filer can exceed 17 points before state tax. "I can defer gains forever" is the second. A 1031 exchange applies only to real property. Selling stocks, funds, or a business interest generally triggers the tax in the year of sale, and there is no stock equivalent of a like-kind exchange.

The third is "small gains do not matter." An active trader who realizes $4,000 of short-term gains a month at a 35% combined rate hands over $16,800 a year, and that capital stops compounding. The fourth mistake is the one agents make: presenting a policy loan as a tax trick. A policy loan is a financing decision. It has a cost, it must be repaid, and it only makes sense when the capital it funds out-earns that cost.

10 / The TradeoffsBenefits and Real Tradeoffs of Borrowing Against a Policy

Borrowing against a policy keeps an appreciated asset invested and avoids realizing a gain, and it carries real costs that disqualify it for many people. Both sides belong in the decision.

The benefits are specific. There is no sale, so no gain is realized: the asset you keep still carries its embedded gain, which stays in place until you sell it or it is stepped up at death. Policy loans do not require credit approval, and the carrier sets no fixed repayment schedule, so you design repayment around the cash flow of the deal. The cash value stays in the policy as collateral and keeps earning, subject to the carrier's loan and dividend terms. For more on how quickly a new policy can support a loan, see how soon you can borrow against whole life insurance.

The tradeoffs are just as specific. A policy takes years to build: cash value does not exceed cumulative contributions before year four, and break-even typically lands at year five or later for a healthy individual. Someone who needs capital next month and has no policy in force gets nothing from this strategy. Loan interest is a real cost paid to the carrier. An unpaid loan that grows past the cash value can lapse the policy, and a lapse with a loan outstanding can create a taxable gain. The discipline of repayment is the whole strategy. A policy that fails the 7702A test becomes a modified endowment contract, and loans from it are taxed as income first, with a 10% penalty before age 59½ in most cases. Design matters, which is why we structure policies the way we describe in overfunded whole life insurance.

A policy loan is financing. Treat it that way.

11 / Head to HeadFour Ways to Raise $143,000 for a Deal

Compared side by side, the four ways the investor in the case study could raise $143,000 differ in the tax triggered, the cost of the capital, and what happens to the appreciated shares. The figures below use that composite: a $61,700 gain, a 24% ordinary bracket, and the 3.8% surtax.

FAQCapital Gains Tax Questions