Capital Gains Tax Basics for Investors
Holding for a year and a day changes which rate schedule applies. It is the cheapest tax planning there is.
At a glance
Figures checked 1 Sep 2026
What to take away
- Assets held over one year qualify for long-term rates, which are substantially lower for most people.
- Cost basis includes reinvested dividends — forgetting this means paying tax twice.
- Fund distributions are taxable even if you never sold a share.
A capital gain is the difference between what you sell for and your cost basis. How long you held it decides which rate applies: short-term gains follow your ordinary income rate, long-term gains follow a separate, lower schedule.
Cost basis and reinvested dividends
Every reinvested dividend buys shares at that day’s price and adds to your basis. Brokers track this for covered shares, but older holdings and transferred accounts often have gaps. Reconstructing basis after the fact is tedious and the default assumption works against you.
Distributions you did not ask for
Mutual funds distribute realised gains to shareholders, typically late in the year. You can owe tax on a fund that fell in value over the same year — which is one of the strongest practical arguments for ETFs in taxable accounts.
Common questions
An additional 3.8% surcharge on investment income above certain income thresholds. It applies on top of the capital gains rate.