Guides · Capital gains
Capital gains basics — short-term, long-term, and the rates
What a capital gain is
A capital gain (or loss) arises when you sell a capital asset — stocks, bonds, real estate, cryptocurrency, mutual funds, exchange-traded funds — for a price different from what you paid for it.
The formula:
Gain = Sale price − Cost basis − Selling expenses
Where:
- Sale price — what you received, net of commissions and fees.
- Cost basis — what you paid to acquire the asset, adjusted for splits, dividends reinvested, and return-of-capital distributions.
- Selling expenses — broker commissions, transfer fees, sometimes legal fees for real estate.
For assets held more than one year (US definition) or however long (UK — no holding period for the preferential rate), the gain is long-term. Held one year or less (US) is short-term. Tax treatment differs sharply.
US: short-term vs long-term
The IRS applies different rates to short-term and long-term gains:
| Holding period | Tax treatment | Rate |
|---|---|---|
| ≤ 1 year (short-term) | Ordinary income tax rates | 10-37% bracket rates |
| > 1 year (long-term) | Preferential rates | 0%, 15%, or 20% |
| Collectibles (held > 1 year) | Higher long-term rate | 28% |
| Section 1202 qualified small business stock (> 5 years) | Excluded up to 100% | 0% on excluded portion |
| Carried interest (held by investment managers) | Same as short-term | 37% bracket |
The US holding period rule is strict: the day of purchase doesn't count, the day of sale does count. If you bought on 15 March 2025 and sell on 15 March 2026, the holding period is exactly one year (long-term). If you sell on 14 March 2026, the holding period is just under one year (short-term). Always measure to the day.
US: long-term capital gains rates
For 2026, the long-term capital gains brackets are:
| Taxable income | Long-term rate |
|---|---|
| Up to $48,350 | 0% |
| $48,351 to $533,400 | 15% |
| Over $533,400 | 20% |
| Taxable income | Long-term rate |
|---|---|
| Up to $96,700 | 0% |
| $96,701 to $600,050 | 15% |
| Over $600,050 | 20% |
Important detail: the long-term capital gains rate is determined by taxable income, not total income. Total income is calculated first, then deductions, then the brackets are applied to the leftover. The 0% bracket applies only when ordinary taxable income (after deductions but before capital gains) is below the threshold. Above it, every dollar of long-term gain is taxed at 15% or 20%.
Example: a single filer with $50,000 of wages and $10,000 of long-term capital gains. Taxable income (after $16,100 standard deduction) = $43,900. Ordinary taxable income = $43,900 - $10,000 = $33,900. The first $14,450 of capital gains fall in the 0% bracket ($48,350 - $33,900 = $14,450). The remaining $10,000 - $14,450 = wait, the math doesn't work — there's only $10,000 in gains, which is less than the $14,450 of 0% bracket space. So all $10,000 is taxed at 0%. The taxpayer owes zero capital gains tax.
US: short-term gains
Short-term gains (assets held ≤ 1 year) are taxed as ordinary income. They're added to wages, salary, and other ordinary income and taxed at the regular brackets. There is no preferential rate.
This makes short-term trading especially tax-inefficient at the margin. A short-term gain for a 32% bracket filer is taxed at 32%; the same gain on a long-term holding would be 15% (or 0% if taxable income is low). The differential can be 15-20 percentage points of tax — a significant drag on active trading strategies.
US: NIIT and state tax
Two additional US tax layers apply to capital gains:
Net Investment Income Tax (NIIT)
A 3.8% surtax on net investment income (capital gains, dividends, interest, rental, non-qualified annuities) for:
- Single filers with MAGI over $200,000.
- Married filing jointly with MAGI over $250,000.
- Married filing separately with MAGI over $125,000.
The 3.8% NIIT applies on top of the regular capital gains rate, so a top-bracket long-term gain is effectively 23.8% (20% + 3.8%) at the federal level.
State tax
Most US states tax capital gains as ordinary income. A few states (Florida, Texas, Washington for non-CG income, etc.) have no state income tax and therefore no state capital gains tax. California has the highest top marginal rate (13.3%) — combined with the federal 23.8%, a top-bracket California investor pays 37.1% on long-term capital gains.
UK capital gains
The UK system is structurally different. There is no long-term vs short-term distinction — gains are taxed based on the asset class and your income tax band:
| Asset class | Basic-rate taxpayer | Higher-rate taxpayer | Additional-rate taxpayer |
|---|---|---|---|
| Residential property | 18% | 24% | 24% |
| Other chargeable gains (shares, funds, etc.) | 18% | 24% | 24% |
| Carried interest | 18% | 28% | 28% |
| Cryptocurrency (same as other gains) | 18% | 24% | 24% |
| Collectibles (rare coins, etc.) | 18% | 28% | 28% |
| Business Asset Disposal Relief (BADR) | 10% | 10% | 10% |
| Investors' Relief | 10% | 10% | 10% |
The annual exempt amount for 2026/27 is £3,000 for individuals (£1,500 for trusts). Below that, gains are tax-free. Above, the rates above apply.
Note: the rates above were updated in the Autumn 2024 Budget. Prior to that, residential property was 18%/24%/24% and other gains were 10%/20%/20%. The 24% rate on shares brings them in line with property. The 28% historic rate is no longer current.
BADR (formerly Entrepreneurs' Relief) provides a 10% rate on the first £1M of lifetime gains from selling a qualifying business. Investors' Relief provides a 10% rate on the first £1M of gains from external investment in unlisted trading companies held 3+ years.
How to calculate the gain
The mechanical steps are the same in both countries:
- Identify the disposal date — the date you sold or otherwise disposed of the asset.
- Identify the acquisition date — usually the purchase date, but inheritance assets use the date of death of the deceased (and a stepped-up basis in the US).
- Calculate cost basis — purchase price plus commissions, plus any reinvested distributions, minus any return-of-capital distributions.
- Calculate proceeds — sale price minus selling commissions.
- Subtract: gain = proceeds − cost basis.
- For shares acquired at different times (e.g., reinvested dividends each quarter), use average cost basis (UK, common in US too) or first-in first-out (FIFO) (US, the default for most brokers).
- Apply the holding-period rule to determine short-term vs long-term treatment (US only).
- Apply the applicable rate.
For US investors holding mutual funds and ETFs, the broker typically tracks cost basis automatically on Form 1099-B. For UK investors, share-pooling rules (Section 104) apply — you average all shares of the same class acquired.
Losses
Capital losses offset gains:
- US: short-term losses offset short-term gains first, then long-term. Long-term losses offset long-term gains first, then short-term. Up to $3,000 of net capital loss can offset ordinary income ($1,500 if married filing separately). Excess carries forward indefinitely.
- UK: losses in the same tax year offset gains of the same type (residential or non-residential). Excess carries forward indefinitely.
Tax-loss harvesting — deliberately realizing losses at year-end to offset gains or up to $3,000 of ordinary income — is a common strategy. Note the US wash-sale rule: buying a "substantially identical" security within 30 days before or after the loss disallows the loss. The UK has no equivalent rule.
Tax wrappers and exemptions
Both countries offer ways to invest without triggering capital gains:
US: 401(k), IRA, Roth IRA, HSA, 529
All retirement accounts shelter capital gains and dividends from current tax. Roth accounts add tax-free growth and qualified withdrawal. 529 plans shelter gains used for qualified education expenses.
UK: ISA, SIPP, LISA
ISA wrappers (Stocks & Shares ISA, LISA) shelter gains and dividends from UK tax. SIPP (workplace or self-invested pension) shelters gains, with tax relief on contributions and taxable withdrawals (except the 25% tax-free portion).
Both: principal residence exemption
- US: §121 exclusion — single filers can exclude up to $250,000 of gain from the sale of a principal residence; married filing jointly up to $500,000. Must have owned and used the home as a principal residence for at least 2 of the last 5 years.
- UK: Private Residence Relief — full exemption for gains on a home that has been your only or main residence throughout the period of ownership. Lettings relief may apply if you let part of the home.