When does the 1-year holding period start?

The holding period begins the day after you acquire the asset and ends on the day you sell it. For stock purchased on a brokerage, you're typically acquiring shares on the trade date (not settlement date). For RSUs, the holding period starts on the vesting date — not the grant date. For inherited assets, you automatically receive long-term capital gain treatment regardless of the decedent's or your holding period.

Are qualified dividends taxed the same as long-term capital gains?

Yes — qualified dividends are taxed at the same preferential rates as long-term capital gains (0%, 15%, or 20%). A dividend qualifies if it's paid by a U.S. corporation (or certain foreign corporations) and you've held the stock for more than 60 days during the 121-day window surrounding the ex-dividend date. Non-qualified (ordinary) dividends are taxed at ordinary income rates.

What is the 0% capital gains rate — who qualifies?

The 0% long-term capital gains rate applies to individuals with taxable income below $48,350 (single, 2025) or $96,700 (married filing jointly, 2025). For a business owner who has a low-income year — perhaps the first year of a business, a sabbatical, or a year with large deductions — strategically realizing gains in that year to use the 0% bracket is a meaningful planning opportunity. This is sometimes called 'gain harvesting' as opposed to loss harvesting.

How are capital losses treated?

Capital losses first offset capital gains of the same holding period (short-term losses offset short-term gains; long-term losses offset long-term gains), then cross over to offset the opposite type. If you have net capital losses after offsetting gains, up to $3,000 per year can be deducted against ordinary income. Losses in excess of $3,000 carry forward indefinitely to future years.

Does selling my primary residence create a capital gain?

Often not — the Section 121 exclusion lets you exclude up to $250,000 of gain ($500,000 married filing jointly) on the sale of your primary residence if you lived in it as your primary home for at least 2 of the last 5 years. Gain above the exclusion amount is taxed as capital gain. For business owners who use part of the home as a home office, the exclusion gets more complex — the portion claimed as a home office may not qualify.

Tax planning

Capital Gains Tax Rates: Long-Term vs Short-Term, State Tax, and the NIIT Surcharge

Capital gains are taxed differently depending on how long you held the asset. Long-term gains (held over 1 year) get preferential rates of 0%, 15%, or 20%. Short-term gains are ordinary income. Add state tax and the 3.8% NIIT, and California business owners can face effective rates above 40%.

Written by Matt Reese, CPA · 6 min read · Published April 2026·Share on LinkedIn

Key Takeaways

Long-term capital gains (assets held more than 1 year) are taxed at 0%, 15%, or 20% federally — significantly lower than ordinary income rates. Short-term gains are taxed at ordinary income rates (up to 37%).
The holding period is what determines long-term vs short-term. Selling one day before the 1-year mark converts a 20% gain into a 37% gain. Waiting matters.
The 3.8% Net Investment Income Tax applies on top of capital gains rates for high earners (above $200,000 single / $250,000 MFJ), bringing the top federal rate to 23.8%.
California taxes all capital gains as ordinary income — there is no preferential long-term rate. The top California rate is 13.3%, bringing the combined federal + state rate to over 37% for California residents at the top bracket.

The two capital gains buckets

Every capital gain is either short-term (asset held one year or less) or long-term(asset held more than one year). The holding period determines the tax rate, which is why it’s one of the most important variables in investment planning.

Filing status	0% long-term rate	15% long-term rate	20% long-term rate
Single (2025)	Up to $48,350	$48,351–$533,400	Above $533,400
Married filing jointly (2025)	Up to $96,700	$96,701–$600,050	Above $600,050
Head of household (2025)	Up to $64,750	$64,751–$566,700	Above $566,700

Short-term capital gains are taxed at ordinary income rates — the same brackets as wages, business income, and interest. For high-income business owners, that’s 32%, 35%, or 37% federal.

Holding an asset for one year and one day vs eleven months and 30 days can be the difference between a 20% tax rate and a 37% tax rate on the same gain. The 1-year line is one of the clearest planning opportunities in the tax code.

The full effective rate on capital gains in California

Federal capital gains rates are only part of the picture. California taxes all capital gains — including long-term — as ordinary income:

Component	Long-term gain (federal top bracket)	Short-term gain (federal top bracket)
Federal capital gains tax	20%	37% (ordinary income)
Net Investment Income Tax (NIIT)	3.8%	3.8%
California income tax (top rate)	13.3%	13.3%
Total effective rate	37.1%	54.1%
Depreciation recapture (Section 1250)	25% federal + 13.3% CA + 3.8%	42.1%

California has no preferential capital gains rate

Unlike the federal system, California taxes all capital gains at ordinary income rates — the same as wages and pass-through business income. The top California rate of 13.3% applies to taxable income above $1,000,000. For a California business owner selling a business or investment property, the combined federal + state rate on long-term gain exceeds 37%.

Common capital gain situations for business owners

Transaction	Character	Key considerations
Stock held in brokerage account	Short or long-term depending on holding period	Most straightforward — date on your 1099-B
Sale of S-corp stock	Long-term capital gain (if held 1+ year)	S-corp shareholders also get stepped-up basis on the K-1 at sale
Sale of business assets (equipment)	Section 1245 ordinary income up to depreciation taken; excess is Section 1231 gain	Recapture at ordinary rates, remaining gain potentially long-term
Sale of commercial building	Section 1250 unrecaptured gain at 25% (federal); remainder at LTCG rates	Complex — requires depreciation recapture analysis
Sale of goodwill (personal)	Long-term capital gain	Most valuable allocation in a business sale — often negotiated
Sale of goodwill (enterprise)	Ordinary income for C-corp; capital gain for S-corp pass-through	Entity structure matters for goodwill characterization
Installment sale	Spread over multiple years at applicable rates when received	Can defer gain recognition and potentially spread across tax brackets

Tax-loss harvesting and gain deferral

The interaction of gains and losses creates planning opportunities:

Tax-loss harvesting: Selling investments with embedded losses to offset realized gains — reducing the net gain subject to tax. Losses are most valuable when they offset gains at higher rates (short-term losses offsetting short-term gains first).
Gain harvesting in low-income years: If your income drops to the 0% capital gains bracket (below $96,700 MFJ in 2025), selling appreciated assets up to the bracket ceiling is tax-free federally. Common in early retirement or gap years.
Installment sales: Spreading payments over multiple years can defer gain recognition and avoid large single-year spikes that push income into higher brackets or trigger NIIT.
Timing distributions and sales: If you’re selling a business or large investment, coordinating the timing with your CPA and advisor — considering which tax year produces the lower effective rate — can save meaningful amounts.

Capital gains planning — $500,000 long-term gain, married California owner

Gain from stock sale$500,000

Federal long-term capital gains tax (20%)$100,000

NIIT on the portion above $250,000 MAGI threshold (3.8%)≈ $17,860

California income tax on $500,000 gain (≈ 13.3%)$66,500

Total tax on gain≈ $184,360

Effective rate on the gain≈ 36.9%

If same gain was short-term: federal ordinary income (37%) + CA + NIIT≈ $272,360 total

On a $500,000 long-term gain in California, about 37 cents per dollar goes to taxes. The same gain as short-term would cost about 54 cents per dollar — a $88,000 difference. The one-year holding period is one of the most valuable planning decisions an investor can make.

Cost basis documentation is worth the effort

Your capital gain is calculated as sale price minus adjusted basis — which depends on accurate records of what you paid, reinvested dividends, return of capital distributions, and stock splits going back years. For business assets, it includes purchase price minus all depreciation taken. Missing basis documentation means you may overreport gains and overpay tax. Keep purchase records, brokerage statements, and depreciation schedules permanently.

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Net Investment Income Tax: The 3.8% Surtax That Surprises High-Earning Business Owners

The 3.8% NIIT applies to investment income for individuals above $200,000 in modified AGI — on top of regular income tax and capital gains rates. It applies to passive business income, rental income, and gains from selling a business.

Tax planning

Depreciation Recapture: Why Selling Business Assets Costs More Than You Expect

When you sell a depreciated business asset, the IRS recaptures those deductions — taxing the gain up to the amount of depreciation taken at ordinary income rates. Section 1245 vs Section 1250, the impact of bonus depreciation, and how recapture affects business sales.

Deal structure

Asset Sale vs Stock Sale: What Business Owners Actually Pay

A plain-English comparison of how each structure taxes the same exit — and why buyers and sellers usually want opposite things.

Frequently asked

Questions owners actually ask

When does the 1-year holding period start?: The holding period begins the day after you acquire the asset and ends on the day you sell it. For stock purchased on a brokerage, you're typically acquiring shares on the trade date (not settlement date). For RSUs, the holding period starts on the vesting date — not the grant date. For inherited assets, you automatically receive long-term capital gain treatment regardless of the decedent's or your holding period.
Are qualified dividends taxed the same as long-term capital gains?: Yes — qualified dividends are taxed at the same preferential rates as long-term capital gains (0%, 15%, or 20%). A dividend qualifies if it's paid by a U.S. corporation (or certain foreign corporations) and you've held the stock for more than 60 days during the 121-day window surrounding the ex-dividend date. Non-qualified (ordinary) dividends are taxed at ordinary income rates.
What is the 0% capital gains rate — who qualifies?: The 0% long-term capital gains rate applies to individuals with taxable income below $48,350 (single, 2025) or $96,700 (married filing jointly, 2025). For a business owner who has a low-income year — perhaps the first year of a business, a sabbatical, or a year with large deductions — strategically realizing gains in that year to use the 0% bracket is a meaningful planning opportunity. This is sometimes called 'gain harvesting' as opposed to loss harvesting.
How are capital losses treated?: Capital losses first offset capital gains of the same holding period (short-term losses offset short-term gains; long-term losses offset long-term gains), then cross over to offset the opposite type. If you have net capital losses after offsetting gains, up to $3,000 per year can be deducted against ordinary income. Losses in excess of $3,000 carry forward indefinitely to future years.
Does selling my primary residence create a capital gain?: Often not — the Section 121 exclusion lets you exclude up to $250,000 of gain ($500,000 married filing jointly) on the sale of your primary residence if you lived in it as your primary home for at least 2 of the last 5 years. Gain above the exclusion amount is taxed as capital gain. For business owners who use part of the home as a home office, the exclusion gets more complex — the portion claimed as a home office may not qualify.

Take the next step

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Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.