A capital gain is the profit you realize when you sell an investment for more than you paid for it. For example, if you bought a stock at $50 and sell it at $150, you have a $100 realized capital gain. Simple! How it gets taxed is a bit more complicated. Here are some key things to know:

Realized vs. Unrealized Gains. Capital gains on investment assets are taxed when gains are realized, which means you’ve actually sold the asset. Importantly, if you continue to hold a stock that’s risen from $50 to $150, that gain is unrealized and is not taxed.

Short-term vs. Long-term Gains. Tax rates vary depending on how long you hold an investment before selling. Short-term gains apply to anything held one year or less, and are taxed as ordinary income. Depending on your tax bracket, that could mean a federal rate as high as 37%. Long-term gains — which apply to assets held more than one year prior to selling — are taxed at preferential rates: 0%, 15%, or 20% at the federal level, depending on your total income. High earners may also owe an additional 3.8% Net Investment Income Tax, bringing the top federal tax rate on long-term capital gains to 23.8%.

Federal & State Taxes. The figures cited above are federal tax rates; state taxes add another layer. Most states tax capital gains as ordinary income regardless of how long you owned the investment, with rates ranging from roughly 3% to 14%. The highest-tax states include California, New Jersey, and Oregon (each around 13%), and New York (around 11%). A number of states — including Alaska, Florida, Nevada, Tennessee, Texas, Washington, and Wyoming — have no state capital gains tax.

One more important concept: cost basis. Your cost basis is what you paid for an asset, and it’s what the gain is calculated against. If you inherited stock, your basis is typically the value at the time of inheritance — which means you may owe less in taxes than you think.

Taxes are pretty personal! How capital gains affect your tax bill very much depends on your overall tax situation — and that may vary from year to year. Here are some important things to consider:

Capital gains taxes apply to taxable accounts, not IRAs. If your appreciated stocks are held in a traditional IRA or Roth IRA, capital gains are not subject directly to taxation. Instead, traditional IRAs are taxed only when you withdraw funds (usually in retirement), and Roth IRAs are generally tax-free. Taxes on realized gains apply primarily to individual, joint, and trust accounts — that is, taxable brokerage accounts.

Position size matters — for taxes and for risk. When a single stock grows to represent a large share of your portfolio, you face two compounding problems: concentration risk (if the stock drops, it hurts) and a large, embedded tax liability (if you sell, you owe). As a general guideline, we think about 5% as a reasonable maximum size for any single position in most circumstances. Above that, the risk — and the tax challenge — tends to outweigh the upside of continued concentration.

Sometimes, your capital gains may not actually generate a tax bill. Many people assume that realizing a large gain means a large tax bill. That can be true — but not always. For taxpayers with lower overall income in a given year (including people who have recently retired and have limited earned income), a portion of capital gains may be taxed at 0% at the federal level. We have seen real cases of clients who were reluctant to sell appreciated positions, not realizing they would have owed little or nothing that year. This is exactly why tax planning needs to be personalized.

There is no single right answer for managing a concentrated, appreciated position. The right approach depends on your tax situation, your financial goals, your values, and your timeline. Here are the main levers:

Sometimes, it’s prudent to hold. Not every appreciated position needs to be sold. If a stock represents a reasonable share of your portfolio, if you believe in its long-term fundamentals, and if the tax cost of selling is high relative to the risk of holding, then waiting can be the right call. This is especially true when you’re close to the one-year mark and can convert a short-term gain into a long-term one by holding a bit longer.

You may be able to offset gains with realized losses. If you hold other positions that have declined in value, selling them can generate losses that offset your gains dollar for dollar. This is called tax-loss harvesting, and it’s one of the most reliable tools in the tax planning toolkit. Market downturns, while unwelcome, are often the best opportunities for this — and we actively look for them on your behalf.

You can often help offset capital gains taxes with charitable gifts. If you’re charitably inclined, giving to your favorite non-profit organizations provides you with a tax deduction that can help reduce your capital gains tax bill. Charitable gifts can be made with cash or with stock — and importantly, donating appreciated stock directly to a charity or donor-advised fund (DAF) is often the most tax-efficient move available. When giving with appreciated shares of stock, you avoid capital gains tax on the donated shares entirely and receive a deduction for the full fair market value. For clients who give regularly, this approach can be significantly more powerful than donating cash.

Charitable gifts can be made with cash or with stock — and importantly, donating appreciated stock directly to a charity is often the most tax-efficient move available.

You could wait for the step-up in basis. In most cases, when an asset passes to heirs, the cost basis resets to the current market value — meaning the embedded capital gain disappears. We don’t generally recommend holding a concentrated position simply to await this eventual step-up in basis. But for assets you intend to leave to heirs and that represent a manageable share of your portfolio, this is worth being aware of.

Circling back to this calendar year, with its outsized gains in AI-driven stocks, here are a few key questions to ask now:

Do you have losses to realize? If other positions in your portfolio have declined, this could be an opportunity to harvest those losses and offset some of your gains. We review this regularly, but it’s worth a conversation if you have positions you’ve been meaning to exit anyway.

Are you considering charitable gifts this year? If so, giving appreciated stock rather than cash is almost always the better move. And if you’ve been thinking about bunching several years of charitable giving into one year — a strategy to maximize itemized deductions — 2026, with its higher gains, may be exactly the right year to do it.

What does your overall tax picture look like? Have your income or circumstances changed this year in ways that affect your bracket? A retirement, a job change, a large one-time event? These can all shift the calculus significantly.