What You Need to Know About Taxation of Capital Gains Starting in 2026

The preferential capital gains tax rates provided by the Tax Cuts and Jobs Act (TCJA) are set to expire as of December 31, 2025. These changes could impact a wide range of investors, from individual stockholders to real estate investors. Understanding these adjustments is crucial for effective tax planning, financial planning, and investment strategy.

A capital gains tax is imposed on the profit from the sale of an asset, which includes stocks, bonds, real estate, and other investments and is typically categorized into short-term and long-term, each with different tax rates. Short-term capital gains are from assets held for one year or less and are taxed at ordinary income tax rates. Long-term capital gains are from assets held for more than a year and are taxed at lower preferential tax rates.

1. Increased Capital Gain Tax Rates for High-Income Earners: One of the most significant changes set for 2026 is the increase in long-term capital gains tax rates for high-income earners. Currently, the highest tax rate for long-term capital gains is 20%. Starting in 2026, the new highest expected rate is 25%. Individuals with taxable income of more than $518,900 (single filers) or $583,750 (married filing jointly) are in the 20% capital gains tax bracket as of 2024.
2. Modification of Income Thresholds: The income thresholds for capital gains tax rates are also slated to change. While specific details are yet to be finalized, it is anticipated that the income levels at which higher tax rates apply will be adjusted. This adjustment aims to increase the tax burden on higher-income individuals while providing some relief for middle-income taxpayers.
3. Changes to the Net Investment Income Tax (NIIT): The NIIT, which adds an additional 3.8% tax on investment income for high-income earners, will see changes as well. The income threshold for this tax may be lowered, which could potentially increase the number of taxpayers subject to this additional tax. Income subject to NIIT, as of 2024, is the excess of modified adjusted gross income over $200,000 for single filers and $250,000 for married filing jointly filers.
4. Adjusted Basis Step-Up at Death: The basis step-up, which allows heirs to reset the value of inherited assets to market value at the time of the original owner’s death, might be limited. This change could result in higher capital gains taxes when inherited assets are sold, significantly affecting estate planning strategies.

These changes underscore the importance of proactive tax and financial planning. A few strategies to consider include:

• Re-Evaluating Investment Holdings: Review and discuss your investment portfolio with your advisor. Consider whether it makes financial sense to sell high-gain assets before December 31, 2025 or look for future loss-harvesting opportunities to offset higher capital gains tax rates in 2026.
• Exploring Tax-Advantaged Accounts: Utilize retirement accounts like traditional and Roth IRAs and 401(k)s, which offer tax deferral on gains and can become even more beneficial under the new tax regime.
• Estate Planning Revisions: With the potential limitations on the basis step-up at death, revisiting your estate plan to incorporate more tax-efficient strategies will be crucial.
• Charitable Giving: Donating appreciated assets to charity can provide significant tax advantages and may be an effective strategy to mitigate higher capital gains taxes.

As we approach the upcoming national election, the potential for changes in tax legislation is heightened, with shifts in political priorities that could alter the proposed capital gains tax depending on the election’s outcome. Candidate positions on tax policies could lead to negotiations that either reinforce or modify the planned changes for 2026. Investors should stay informed about the election and its implications as these outcomes could significantly influence tax planning and investment strategies.

The expected change to capital gains taxation starting in 2026 represents a significant shift in tax policy aimed at increasing the tax burden on high-income earners. While these adjustments may seem daunting, with careful planning and strategic adjustments, investors can navigate these changes effectively. Consult with an Aldrich tax professional and Aldrich Wealth advisor who can help tailor strategies to your specific situation, ensuring that your investment and estate plans remain tax-efficient in this evolving landscape.

Staying informed and proactive will be key to minimizing the impact of these upcoming changes and maximizing your financial well-being.

Investment advisory services are provided by Aldrich Wealth LP, a registered investment advisor with the SEC. Tax advisory services are offered through Aldrich CPAs + Advisors. These services are provided under separate agreements.