Quick Answer
Hold an asset one year or less and gains are ordinary income (up to 37%); hold more than one year for the preferential 0%, 15%, or 20% long-term rate. Qualified dividends get those same preferential rates; real estate investment trust (REIT) dividends stay ordinary. The wash-sale rule disallows a loss on a substantially identical repurchase within 30 days.
The whole unit on one sheet: income taxation, capital gains, cost basis, dividends, the alternative minimum tax, and the account and transfer rules the exam loves.
The One-Liners That Win Points
- Short-term capital gain = held 1 year or less, taxed at ordinary income rates (up to 37%).
- Long-term = held more than 1 year (1 year plus 1 day), taxed at 0%, 15%, or 20% depending on taxable income.
- Qualified dividends get the same preferential 0%/15%/20% rates as long-term gains; non-qualified (ordinary) dividends are taxed at ordinary income rates.
- Marginal rate applies to the last dollar of income; effective rate is always lower because lower income fills lower brackets first.
- Tax-loss harvesting: net losses offset capital gains dollar-for-dollar with no limit, then up to $3,000/year of remaining loss offsets ordinary income; the rest carries forward indefinitely.
- Cost basis = purchase price plus commissions and fees; splits and stock dividends adjust basis per share but leave total basis unchanged.
- Inherited asset = stepped-up basis to fair market value (FMV) at death (embedded gains eliminated); gifted asset = carryover of the donor's original basis (gains preserved).
- Tax-advantaged accounts (municipal bonds, retirement accounts) are most valuable to investors in higher marginal brackets.
Numbers to Lock In
| Item | Value |
|---|---|
| Long-term capital gains / qualified dividend rates | 0%, 15%, or 20% |
| Max ordinary income rate | 37% |
| Seven ordinary brackets | 10%, 12%, 22%, 24%, 32%, 35%, 37% |
| Net Investment Income Tax (NIIT) surtax | 3.8% (modified adjusted gross income above $200,000 single / $250,000 married filing jointly) |
| High-income long-term gain effective rate | 23.8% (20% plus the 3.8% surtax) |
| Net capital loss vs. ordinary income | up to $3,000/year ($1,500 married filing separately) |
| Wash-sale window | 30 days before or after the sale |
| Qualified dividend holding period | more than 60 days during the 121-day period around the ex-dividend date |
| Alternative minimum tax (AMT) rates | 26% and 28% (28% above approximately $244,500 of AMTI) |
| C-corporation tax rate | 21% flat |
Top Gotchas
- Wash-sale loss is deferred, not lost. A loss disallowed on a substantially identical repurchase within 30 days is added to the cost basis of the replacement security.
- The $3,000 limit is only for losses against ordinary income. There is no cap on using capital losses to offset capital gains.
- Short vs. long-term hinges on 1 year plus 1 day. One year or less is short-term and taxed as ordinary income; the preferential rate needs more than a year.
- REIT dividends are ordinary income, not qualified dividends, even though REITs look corporation-like. This is one of the most tested points.
- Master limited partnership (MLP) distributions are mostly return of capital reported on a Schedule K-1; they are not qualified dividends.
- AMT triggers: incentive stock option (ISO) exercises and private activity municipal bond interest (tax-exempt for regular tax but included in AMTI); the taxpayer pays the greater of regular tax or AMT.
Memory Aid: Death Deletes, Gift Grandfathers
- Death = Delete the gain (step-up to FMV).
- Gift = Grandfather the basis (carryover).
One-Breath Recap
Holding period drives everything: one year or less is short-term ordinary income, more than a year earns the preferential 0%, 15%, or 20% long-term rate that qualified dividends also share, while REIT dividends and MLP distributions stay ordinary. Harvest losses to offset gains dollar-for-dollar, then up to $3,000 against ordinary income, but watch the wash-sale rule, which defers any loss on a substantially identical repurchase within 30 days by adding it to the new basis. Cost basis starts at purchase price plus fees; inherited assets step up to fair market value while gifts carry over the donor's basis. Layer on the alternative minimum tax for ISO exercises and private activity bonds, and this two-percent unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Tax Considerations unit for the complete lesson.