Retirement changes the way you manage your finances. Instead of relying primarily on a paycheck, you may begin drawing income from Social Security, pensions, retirement accounts, and taxable investments.
While much of retirement planning focuses on how much money you've accumulated, an equally important consideration is how much of that money you'll keep after taxes.
One area worth understanding is capital gains taxation.
When you sell investments in a taxable brokerage account, the amount of tax you owe can depend on several factors, including your original investment cost, how long you've owned the investment, and your overall taxable income.
Understanding these rules can help you make more informed decisions about managing your investments and generating income throughout retirement.
What Are Capital Gains Taxes?
A capital gain generally occurs when you sell an investment for more than its adjusted cost basis.
Your cost basis is typically the amount you originally paid for an investment, adjusted for certain transactions or events.
For example, suppose you purchased shares of a mutual fund for $50,000. Several years later, those shares have appreciated to $80,000.
If you sell the entire position, assuming no basis adjustments or selling expenses, you would realize a $30,000 capital gain.
An important distinction is that an investment increasing in value does not ordinarily create a capital gains tax liability by itself. In a taxable brokerage account, capital gains generally become taxable when an investment is sold.
This distinction between unrealized gains and realized gains is important because it gives investors some control over when they recognize taxable investment gains.
Source: Internal Revenue Code (IRC) §§ 1001 and 1012; IRS Topic No. 409.
Short-Term vs. Long-Term Capital Gains
Not all capital gains receive the same federal income tax treatment.
The tax treatment of a capital gain generally depends on how long you owned the investment before selling it.
Short-Term Capital Gains
Short-term capital gains generally apply to investments held for one year or less.
These gains are subject to ordinary federal income tax rates, which may be higher than the rates applicable to long-term capital gains.
Long-Term Capital Gains
Long-term capital gains generally apply to investments held for more than one year.
For most investments, net long-term capital gains may qualify for preferential federal income tax rates of:
0% for qualifying taxpayers with lower taxable incomes.
15% for taxpayers within the applicable middle income ranges.
20% for taxpayers with higher taxable incomes.
The applicable rate depends on your taxable income and filing status.
Certain investments and types of gains are subject to different tax rules. For example, some collectible gains may be subject to a maximum 28% rate, while certain real estate-related gains may be subject to a maximum 25% rate.
For retirees holding appreciated investments in taxable brokerage accounts, understanding the difference between short-term and long-term gains can be an important part of making informed investment decisions.
Source: IRC § 1(h); IRS Topic No. 409.
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Understanding the 0% Long-Term Capital Gains Tax Rate
One of the more notable features of the federal tax code is that certain taxpayers may qualify for a 0% federal income tax rate on some or all of their net long-term capital gains.
This rate is determined by taxable income and filing status, rather than retirement status or age.
For example, an individual who has retired and experiences a reduction in taxable income may qualify for a lower long-term capital gains tax rate than they did while working.
However, the amount of capital gains eligible for the 0% rate depends on the taxpayer's overall taxable income.
Ordinary taxable income and preferentially taxed capital gains interact when determining which capital gains tax rates apply.
This means that not every retiree will qualify for the 0% rate, and not every dollar of long-term capital gains will necessarily receive the same tax treatment.
The income thresholds used to determine eligibility are adjusted annually under federal tax law.
For this reason, reviewing the applicable tax brackets before selling a significant investment position can be an important part of retirement tax planning.
Source: IRC § 1(h); IRS Topic No. 409.
Using Capital Losses to Offset Capital Gains
Capital gains are only one side of the equation.
When investments decline in value and are sold for less than their adjusted cost basis, investors may realize capital losses.
Under federal tax rules, allowable capital losses can generally be used to offset capital gains.
For example, suppose you sell one investment and realize a $20,000 long-term capital gain.
During the same year, you sell another investment at a $7,000 long-term capital loss.
Assuming there are no other capital transactions or applicable adjustments, your net long-term capital gain would be $13,000.
If allowable capital losses exceed capital gains, individual taxpayers may generally deduct up to $3,000 of the remaining net capital loss against other income each year, or $1,500 if married filing separately.
Unused capital losses can generally be carried forward to future tax years, subject to applicable rules.
This strategy is commonly referred to as tax-loss harvesting.
However, investors must also consider the wash-sale rule, which can disallow a loss deduction when substantially identical stock or securities are acquired within 30 days before or after a sale at a loss.
Investment decisions should not be made solely for tax purposes. Any decision to sell an investment should also account for your portfolio allocation, investment objectives, and long-term financial plan.
Source: IRC §§ 1091, 1211, and 1212; IRS Publication 550.
The Additional 3.8% Net Investment Income Tax
Some higher-income retirees may also be subject to an additional federal tax known as the Net Investment Income Tax (NIIT).
Under IRC § 1411, the NIIT generally applies at a rate of 3.8% to the lesser of:
An individual's net investment income.
The amount by which modified adjusted gross income exceeds the applicable statutory threshold.
In 2026 the thresholds are:
Married filing jointly —— $250,000
Single or head of household —— $200,000
Married filing separately ——- $125,000
Net investment income can include certain taxable interest, dividends, capital gains, rental income, and other investment income.
Consequently, some taxpayers may owe both regular federal income tax on capital gains and the additional NIIT.
Unlike ordinary federal income tax brackets, these statutory NIIT thresholds are not automatically adjusted annually for inflation.
Source: IRC § 1411; IRS Topic No. 559.
Why Capital Gains Planning Matters in Retirement
For many retirees, taxable brokerage accounts represent an important source of retirement income.
These accounts may contain investments purchased over many years, some of which have accumulated substantial unrealized gains.
When determining which investments to sell, it's important to understand that the amount of cash received from a sale is not necessarily the amount of taxable income generated.
For example, selling $50,000 of investments does not automatically mean that you have generated $50,000 in capital gains.
The taxable gain generally depends on the difference between the sale proceeds and the adjusted cost basis of the investments sold.
This distinction can be important when evaluating how to generate retirement income.
A comprehensive retirement income strategy should consider several factors, including your anticipated spending needs, investment allocation, tax situation, and long-term financial objectives.
The objective is not necessarily to minimize taxes in any single year, but to make informed financial decisions that support your needs throughout retirement.
Final Thoughts
Understanding capital gains taxes is an important component of retirement planning.
The difference between short-term and long-term capital gains, the availability of preferential federal tax rates, and the ability to offset gains with allowable capital losses can all influence the after-tax value of your investments.
For retirees with substantial taxable investment accounts, these considerations deserve attention when developing a retirement income strategy.
At Morrissey Wealth Management, we believe retirement planning should consider more than investment performance alone. A comprehensive financial plan should also account for how investment decisions, taxes, and income needs work together to support your long-term financial goals.
If you're approaching retirement or already retired, working with a financial planner can help you develop a coordinated strategy for managing your investments and retirement income.
As always have a wonderful day,
a better weekend,
and I look forward to writing to you next Friday!
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast
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Frequently Asked Questions
Do retirees have to pay capital gains taxes?
Yes. Retirement status alone does not exempt an individual from capital gains taxes. However, retirees with qualifying taxable income may be eligible for preferential long-term capital gains tax rates, including the 0% federal rate.
Are long-term capital gains always taxed at 15%?
No. Most net long-term capital gains are subject to federal rates of 0%, 15%, or 20%, depending on taxable income and filing status. Certain gains may be subject to special rates.
Do I owe capital gains taxes if my investments increase in value but I don't sell them?
Generally, an increase in an investment's market value alone does not create a capital gains tax liability. However, taxable investment distributions may occur even when an investor does not sell shares.
Can capital losses reduce my taxes?
Potentially. Allowable capital losses can generally offset capital gains. If losses exceed gains, individual taxpayers may be eligible for a limited deduction against other income, with unused losses generally carried forward.
Is the amount I withdraw from my brokerage account the same as my taxable capital gain?
Not necessarily. When investments are sold, the capital gain or loss is generally calculated using the sale proceeds and adjusted cost basis, rather than treating the entire amount received as taxable gain.