We often hear from clients who are considering whether to harvest capital gains or losses. The rules can affect individuals, business owners and investors with pass-through income, so below is a high-level overview for 2026 tax planning. 

What are capital gains?  

Capital gains are grouped and taxed based on holding period. Long-term capital gains or losses generally come from assets held for more than 12 months. Short-term gains or losses generally come from assets held for 12 months or less. This character is maintained when gains or losses pass through from a partnership, S corporation, trust, estate or mutual fund. 

All capital asset gains and losses - short term and long term - are netted. It does not matter whether the gain comes from selling stock, land or another capital asset; the items are reported together: 

• Short-term capital gains and losses are netted first. Carryover of any short-term loss from a prior year is first applied to short-term gains, if any. 
• If you have a net short-term loss, it is applied against net long-term gains. 
• Net short-term gains after netting against long-term losses are taxed at ordinary income tax rates. 
• If the result is a net long-term gain, that amount is taxed at capital gains rates. 
• If the combined result is a loss on federal, individuals may generally use only $3,000 to offset ordinary income. The remaining federal loss is carried forward to the next year. While Michigan, Texas and Georgia follow the federal limitation, Alabama does not have the same limitation, and net capital losses may generally be applied against other Alabama income. 

A couple of examples help illustrate the rules: 

• In 2026, Rusty has $150,000 of ordinary income, $10,000 of net short-term capital losses and $15,000 of net long-term capital gains. After netting, Rusty has $5,000 of long-term capital gain taxed at capital gains rates. 
• Mary has $75,000 of W-2 income, $5,000 of short-term capital losses and $3,000 of net long-term losses. Her total capital loss is $8,000. For federal purposes, she can use $3,000 against ordinary income and the remaining $5,000 carries forward. 

What do I pay on capital gains? 

Federal 

The special federal income tax rates on qualified dividends and long-term capital gains are 0%, 15% and 20%. For 2026, the 0% rate applies to taxable income up to $98,900 for married filing jointly taxpayers and $49,450 for single taxpayers. The 15% rate applies above those amounts up to $613,700 for married filing jointly taxpayers and $545,500 for single taxpayers. Long-term capital gains above those thresholds are taxed at 20%. 

Short-term capital gains are taxed at ordinary income rates - the same general rates that apply to wages, interest and non-qualified dividends. 

High-income taxpayers may also owe the 3.8% net investment income tax (NIIT). The NIIT generally applies to taxpayers with modified adjusted gross income over $250,000 for married filing jointly taxpayers or $200,000 for single taxpayers. It may apply to investment income such as interest, dividends, rents, capital gains and passive activity income. 

For federal purposes, the maximum long-term capital gains rate is generally 23.8%, which is the 20% capital gains rate plus the 3.8% NIIT. Certain items, such as collectibles, qualified small business stock and unrecaptured Section 1250 gain from depreciable real estate, may be subject to special rules. 

Beware wash sales 

If you sell a security at a loss and repurchase the same or substantially identical security within 30 days before or after the sale, the loss may be disallowed under the wash sale rules and added to the basis of the new purchase. 

Planning point for business owners and high-net-worth individuals 

Capital gain planning should be coordinated with estimated tax payments, pass-through income, charitable giving, installment sale reporting, depreciation recapture and state residency or apportionment issues. Before year-end sales are completed, consider whether gains can be paired with available losses and whether the transaction will affect NIIT, alternative minimum tax, state tax or cash flow planning. 

Our tax advisors are here to guide you through this complex issue. Contact us to obtain assistance or seek answers for specific questions.