how are stock gains and losses taxed (US guide)

This article explains how are stock gains and losses taxed under U.S. federal rules: realized vs. unrealized gains, holding‑period tests, tax rates (short‑ vs long‑term), NIIT, basis methods, repor...

2026-01-28 10:53:00

By Blockchain Linguist

Article rating

4.7

110 ratings

Bitget offers a variety of ways to buy or sell popular cryptocurrencies. Buy now!

A welcome pack worth 6200 USDT for new users! Sign up now!

Taxation of Stock Gains and Losses (United States)

Quick take: If you’ve asked "how are stock gains and losses taxed," this guide lays out U.S. federal rules for realized and unrealized gains, holding‑period effects, tax rates including the Net Investment Income Tax, basis calculations, broker reporting, netting rules, wash‑sale consequences, special cases, planning strategies, recordkeeping, and practical examples.

Overview

How are stock gains and losses taxed depends on whether a gain or loss is realized or unrealized, the holding period, the type of security, and the taxpayer’s income. A capital gain occurs when you sell a security for more than your adjusted basis; a capital loss occurs when you sell for less than your adjusted basis. "Realized" gains and losses are those that occur when you sell or otherwise dispose of the security. "Unrealized" (paper) gains or losses reflect changes in market value while you still hold the security and generally are not taxed under current U.S. federal law.

Holding period matters because it determines whether a realized gain is short‑term or long‑term, which affects tax rates. Short‑term gains are taxed as ordinary income; long‑term gains typically qualify for preferential federal rates. Basis, holding period, and the character of distributions (dividends vs. capital gain distributions) are core factors required to determine how are stock gains and losses taxed for federal purposes.

Note on global context: As of January 22, 2026, a CoinSwitch survey reported that 61% of Indian crypto investors want crypto taxed like stocks or mutual funds, highlighting demand for consistent capital‑gains style rules across asset classes. As of early 2025, reporting by NL Times showed the Netherlands considering taxing unrealized gains — a departure from the U.S. realized‑gain norm. These developments show tax policy can differ materially by jurisdiction and may influence investor behavior.

Classification by Holding Period

Short‑term vs. Long‑term

The one‑year holding period test determines whether a gain or loss is short‑term or long‑term. If you hold a stock for one year or less (measured from the day after acquisition through the day of disposition), the gain or loss is short‑term. If you hold for more than one year, it is long‑term.

Short‑term gains are taxed at your federal ordinary income tax rates. Long‑term gains receive preferential federal rates (commonly 0%, 15%, or 20% for most taxpayers), subject to income thresholds and surtaxes. The distinction affects planning: holding an appreciated position past the one‑year mark can reduce federal tax on the gain.

To restate the core question: how are stock gains and losses taxed? The holding period often determines the applicable tax rate, making timing one of the key levers for tax management.

How holding period is counted

Count begins the day after you acquire the stock and ends on the day you sell it. If you buy on January 1 and sell on January 2 of the same year, you have owned it for 1 day (short‑term).
For purchases made by gift, inherited property, or transfers, special rules apply: a donee generally takes the donor’s holding period for carryover basis rules; inherited assets typically receive a stepped‑up (or down) basis to the fair market value at the decedent’s date of death (or alternate valuation date), and inherited property’s holding period is usually considered long‑term for capital gains purposes regardless of the actual holding time.
For securities acquired through certain corporate actions (spin‑offs, reorganizations) or via dividend reinvestment plans (DRIPs), the holding period may be affected by the allocation of cost among lots and the date the new units are treated as acquired.

These rules determine in part how are stock gains and losses taxed when assets change hands or change form.

Tax Rates and Surtaxes

Federal ordinary income rates (short‑term gains)

Short‑term capital gains are taxed at the taxpayer’s ordinary federal income tax rates — the same brackets that apply to wages, interest, and other ordinary income. Therefore, short‑term gains may be taxed at higher rates than long‑term gains for taxpayers in upper brackets.

Long‑term capital gains rates

Long‑term capital gains generally qualify for preferential federal rates. For most taxpayers, long‑term gains are taxed at 0%, 15%, or 20% depending on taxable income and filing status. High earners may also face additional surtaxes on investment income (see NIIT below).

The precise income thresholds that determine whether a taxpayer is in the 0%, 15%, or 20% long‑term capital gains bracket change with inflation and tax law. For planning, treat these thresholds as income‑dependent triggers for the preferential rates.

Net Investment Income Tax (NIIT)

A 3.8% Net Investment Income Tax may apply to the lesser of (a) net investment income or (b) the excess of modified adjusted gross income (MAGI) over certain thresholds (for example, $200,000 for single filers and $250,000 for married filing jointly). NIIT applies in addition to regular capital‑gains rates and effectively increases the top effective tax rate on investment income for higher‑income taxpayers.

Because NIIT applies to many forms of investment income — including capital gains, dividends, interest, and rental income — planning for NIIT is an important component of understanding how are stock gains and losses taxed for high‑income households.

Special categories with different rates

Some gains are taxed under special rules or rates:

Collectibles (e.g., certain coins, art) are generally subject to a maximum 28% long‑term capital gains rate instead of the standard 20% maximum.
Qualified small‑business stock (QSBS) held for more than five years may qualify for partial or full exclusion of gains under Section 1202 (subject to limits and requirements).
Certain corporate transactions, installment sales, and Section 1256 contracts have unique tax treatments and timing rules.

These categories illustrate exceptions to the simple short‑term/long‑term split when determining how are stock gains and losses taxed.

Basis, Adjusted Basis, and Gain/Loss Calculation

Cost basis and adjusted basis

Cost basis is generally what you paid to acquire the stock, including purchase price plus commissions and fees. Adjusted basis reflects subsequent events that increase or decrease basis:

Increases: additional capital invested, certain corporate reorganizations or adjustments.
Decreases: return of capital distributions, wash‑sale disallowed losses, stock splits (which adjust per‑share basis), and corporate actions that reduce basis.

Common adjustments include reinvested dividends (which increase basis for shares acquired through DRIPs) and disallowed losses under the wash‑sale rule (which are added to the basis of replacement shares).

Understanding basis is essential to answering "how are stock gains and losses taxed," because taxable gain or loss equals proceeds minus adjusted basis (and selling costs).

Cost‑basis methods

Choice of cost‑basis method affects reported gain/loss and tax liability. Common methods:

FIFO (first‑in, first‑out): Default for many brokers if not specified; earliest acquired shares are deemed sold first.
Specific identification: You identify which specific lots you sold, allowing targeted tax outcomes (e.g., selling high‑basis lots to minimize gains or selling low‑basis lots to realize losses).
Average cost: Typically available for mutual fund or certain DRIP shares; the cost of all shares is averaged to determine basis.

Choosing specific identification when possible gives the greatest flexibility to manage how are stock gains and losses taxed in a given year.

Example calculation

A simple formula:

Taxable gain (or loss) = Sales proceeds − Adjusted basis − Selling costs (commissions, certain fees)

Example: Buy 100 shares at $20 = basis $2,000. Sell 100 shares at $50 = proceeds $5,000. Selling commission $20. Gain = $5,000 − $2,000 − $20 = $2,980.

If a wash‑sale rule applied or there were reinvested dividends, basis would be adjusted accordingly before applying the formula.

Reporting and Forms

Broker reporting (Form 1099‑B)

Brokers must report proceeds from stock sales to taxpayers and the IRS on Form 1099‑B. The form typically indicates whether the reported transactions are short‑term or long‑term, and whether basis was reported to the IRS. Always verify 1099‑B data against your own records because brokers may have incomplete or incorrect basis information, especially for older lots or accounts transferred from other brokers.

When asking how are stock gains and losses taxed, remember that brokers’ reports are the primary source the IRS uses to match taxpayer filings, so reconciling broker data is critical to avoid notices.

Tax return forms — Form 8949 and Schedule D

Individual capital transactions are reported on Form 8949, which lists each transaction, date acquired, date sold, proceeds, cost basis, adjustments, and gain/loss. Totals from Form 8949 flow to Schedule D (Capital Gains and Losses) on Form 1040, where netting and summary calculations occur.

When brokers report basis that is different from the taxpayer’s records, taxpayers may need to report the discrepancy and attach appropriate adjustments on Form 8949.

Recordkeeping requirements

Maintain documentation to substantiate acquisition dates, purchase prices, reinvested dividends, splits, wash‑sale adjustments, and sale proceeds. Good records include trade confirmations, account statements, prospectuses (for mutual funds), and year‑end summaries from your broker or Bitget Wallet if used for custody of tokenized securities or tokenized assets on supported platforms.

The IRS recommends keeping records until the statute of limitations expires (typically three years from the date of filing, but longer in some circumstances). Recordkeeping helps explain how are stock gains and losses taxed on your return if audited.

Offsetting Gains with Losses

Netting rules (short‑term vs long‑term)

Netting proceeds follow a specific sequence:

Net all short‑term gains and short‑term losses together (short‑term net).
Net all long‑term gains and long‑term losses together (long‑term net).
If one is a net gain and the other a net loss, offset one against the other to produce a final net capital gain or loss.

This structure means short‑term losses are first available to offset short‑term gains (which are taxed at ordinary rates), making short‑term loss recognition particularly valuable for taxpayers with short‑term gains.

Capital loss deduction limits and carryforwards

If capital losses exceed capital gains for the year, up to $3,000 ($1,500 if married filing separately) of net capital losses may be deducted against ordinary income per year. Unused losses beyond that limit can be carried forward indefinitely to future tax years until fully used.

These rules are central to planning about how are stock gains and losses taxed across multiple years — harvesting losses in one year can reduce future tax on gains.

Wash‑sale rule

The wash‑sale rule disallows a loss deduction when you sell a security at a loss and purchase the same or a "substantially identical" security within 30 days before or after the sale. If a wash sale is triggered, the disallowed loss is added to the basis of the replacement shares, effectively deferring the loss until those replacement shares are sold.

Wash‑sale traps can unintentionally occur with tax‑loss harvesting or when repurchasing similar ETFs, mutual funds, or option positions. Knowing how are stock gains and losses taxed requires attention to the wash‑sale rule’s 61‑day window (30 days before + 30 days after + the sale day).

Distributions, Dividends and Fund‑Level Gains

Mutual fund and ETF capital gain distributions

Mutual funds and some ETFs (particularly actively managed funds) realize gains when they sell underlying holdings and distribute net capital gains to shareholders. These distributions are taxable to shareholders even if the investor reinvests them. Holding period and character rules determine whether those distributions are long‑term or short‑term capital gains when passed through by the fund.

A sale of fund shares by the investor is a separate event: you may still owe tax on distributions the fund made during the year even if you sell your shares afterwards. That is why year‑end fund distributions can create unexpected tax liabilities for shareholders.

Qualified vs. ordinary dividends

Dividends can be "qualified" (eligible for long‑term capital gains rates) or "ordinary" (taxed at ordinary income rates). To be qualified, dividends must meet specific requirements: they must be paid by a U.S. corporation or qualifying foreign corporation and the shareholder must meet a holding‑period test (typically more than 60 days during the 121‑day period surrounding the ex‑dividend date for common stock).

Understanding how are stock gains and losses taxed requires tracking not only sales but also dividend classifications and associated holding periods, since qualified dividends enjoy the favorable 0/15/20% rates rather than ordinary rates.

Special Situations and Exceptions

Gifts and inheritances (basis rules and stepped‑up basis)

Gifts: Generally, a donee assumes the donor’s basis (carryover basis) and holding period. If the donor purchased stock at a low basis, the recipient may face a higher capital gains tax when selling. Special rules apply if the donor’s basis exceeds the fair market value at the time of the gift and the recipient later sells at a loss.
Inheritances: For most decedents, inherited assets receive a stepped‑up (or stepped‑down) basis to the fair market value at the date of death (or alternate valuation date). Inherited property generally receives long‑term capital gains treatment regardless of how long the heir holds the asset. This stepped‑up basis often eliminates capital gains tax on appreciation that occurred during the decedent’s lifetime.

These rules materially affect how are stock gains and losses taxed when assets move between taxpayers.

Retirement and tax‑advantaged accounts

Trades inside IRAs, 401(k)s, and other qualified accounts are generally tax‑deferred (traditional accounts) or tax‑exempt upon qualified distribution (Roth accounts). Gains and losses inside these accounts are not reported annually on Form 8949 or Schedule D. The tax consequences occur upon distribution or withdrawal under the account’s rules. Losses inside tax‑advantaged accounts do not provide an individual taxpayer with a deduction.

For investors using Bitget Wallet or similar custody solutions for tokenized assets, be aware that tax treatment depends on whether holdings are in taxable accounts or within qualified retirement plans.

Opportunity Zones, QSBS, and other preferential treatments

Qualified Opportunity Funds (QOFs): Gains eligible for deferral or partial exclusion if reinvested in QOFs within required timeframes.
Qualified Small Business Stock (QSBS): Under Section 1202, certain QSBS held more than five years may qualify for partial or total exclusion of gain, subject to caps and requirements.

These preferential regimes create targeted opportunities to change how are stock gains and losses taxed for qualifying transactions.

Nonresident aliens and cross‑border issues

Nonresident aliens (NRAs) face different sourcing and withholding rules. U.S.‑source capital gains are generally not taxable to NRAs who are nonresidents unless the gains are effectively connected with a U.S. trade or business or the investor is present in the U.S. for a substantial period. Withholding, treaty provisions, and residency tests complicate cross‑border taxation. Foreign investors should consult a specialist to determine how are stock gains and losses taxed in cross‑border contexts.

Tax‑Reduction Strategies and Planning

Holding period management

Holding appreciated securities beyond the one‑year mark converts potential short‑term gains (taxed at ordinary rates) into long‑term gains that usually qualify for lower capital‑gains rates. This timing decision is one of the simplest levers to influence how are stock gains and losses taxed.

However, investors must weigh market risk and investment goals against tax savings; tax considerations alone should not drive suboptimal investment choices.

Tax‑loss harvesting

Tax‑loss harvesting involves selling losing positions to realize losses that offset gains or up to $3,000 of ordinary income, then replacing the position with a substantially different security (to avoid the wash‑sale rule). Harvesting can be applied throughout the year or at year‑end, but careful attention to the wash‑sale rule and portfolio rebalancing needs is required.

When implementing tax‑loss harvesting, platform features like lot selection tools and cost‑basis reporting (available with many brokers and custodians; Bitget provides robust reporting tools for supported assets) can help optimize outcomes.

Lot selection and basis optimization

If you own multiple lots with different purchase dates and bases, specific‑identification of lots on sale can control realized short‑term vs long‑term gains and affect taxable amounts. Document lot identification at the time of sale and confirm broker instructions for lot identification to ensure consistent reporting to the IRS.

Strategic lot selection helps answer practical investor questions about how are stock gains and losses taxed in a given tax year.

Charitable donations and gifting strategies

Gifting appreciated stock to a public charity allows donors to avoid capital gains tax (if the donor has held the stock long‑term) and potentially take a charitable deduction for the fair market value, subject to AGI limits. Donating appreciated property directly to charity is often more tax‑efficient than selling the asset and donating cash.

Gifting appreciated stock to family members in lower tax brackets can shift tax liability, but beware of the kiddie tax and other anti‑abuse rules. For charitable and gifting strategies, consult tax counsel to ensure correct implementation.

State and Local Taxes

State and local income taxes may apply to capital gains, and rules vary by jurisdiction. Some states conform to federal definitions and rates; others have distinct treatments or no income tax at all. When evaluating how are stock gains and losses taxed in your overall tax picture, include state and local taxes in planning, as they can materially change after‑tax returns.

Common Pitfalls and Compliance Issues

Common errors that lead to misreporting or IRS notices include:

Using incorrect cost basis (especially for older holdings or account transfers).
Failing to account for wash‑sales across taxable accounts, retirement accounts, or different brokers.
Missing or misclassifying fund distributions and not tracking reinvested distributions that increase basis.
Failing to reconcile Form 1099‑B and broker statements with return figures on Form 8949 and Schedule D.

Good recordkeeping, using broker reporting tools, and consulting a tax professional for complex cases reduces the risk of noncompliance.

Examples and Illustrative Scenarios

Below are short worked examples illustrating key rules about how are stock gains and losses taxed.

Short‑term vs long‑term taxation

Scenario: Alice buys 50 shares of Company X at $100 on January 1, 2024, and sells those shares on June 1, 2024 at $150. Her holding period is less than one year, so she realizes a short‑term gain of $2,500 (50 × $50) taxed at her ordinary income rate.
If Alice instead sold on February 2, 2025 (holding > 1 year), the $2,500 would be a long‑term gain subject to the preferential long‑term capital gains rate.

Using losses to offset gains and ordinary income

Scenario: Bob has $10,000 of long‑term gains and $7,000 of short‑term losses. First, net short‑term losses against short‑term gains (if any). Then long‑term net is $10,000. Cross‑netting results in $3,000 net long‑term gain ($10,000 − $7,000). That $3,000 is taxed at long‑term rates.
If Bob instead had $12,000 of capital losses and no gains, he could deduct $3,000 against ordinary income in the current year and carry forward $9,000 to future years.

Applying the wash‑sale rule

Scenario: Carol buys 100 shares at $50. Shares fall to $30, and she sells at a $2,000 loss on December 15. She repurchases identical shares on December 30 (within 30 days). The $2,000 loss is disallowed and added to the basis of the replacement shares, deferring the loss until she sells the replacement shares outside the wash‑sale period.

These examples show how transaction timing, wash‑sale rules, and netting influence how are stock gains and losses taxed.

Disclaimer

This article provides a general overview of U.S. federal tax rules for stock gains and losses and is not individualized tax advice. Tax laws and thresholds change. For personalized guidance on how are stock gains and losses taxed in your situation, consult the IRS guidance or a qualified tax professional.

Next steps: To manage tax reporting efficiently, reconcile your broker Form 1099‑B with your own records, consider lot‑level inventory methods, and consult a tax advisor for complex scenarios. If you custody assets or trade securities via a platform, consider Bitget for comprehensive account reporting and Bitget Wallet for secure custody solutions that assist with recordkeeping and transaction histories.

Further exploration: review IRS Topic 409 and Form 8949 instructions, or consult a certified tax professional to apply these principles to your circumstances.

The content above has been sourced from the internet and generated using AI. For high-quality content, please visit Bitget Academy.