Capital Gains and Losses: What to Know Before Year-End

Understanding how investment gains and losses can affect your 2026 tax situation

As the end of 2026 approaches, now is a good time to review your investments and consider how they may affect your taxes.

If you've sold stocks, mutual funds, real estate, or other investments this year, you may have realized capital gains or losses. Understanding how these are taxed can help you make more informed financial decisions before December 31.

Whether you've experienced investment gains, losses, or a combination of both, there are several important considerations to keep in mind as the year comes to a close.

What Are Capital Gains and Losses?

A capital gain occurs when you sell an investment or capital asset for more than its adjusted cost basis, which is generally what you originally paid, with certain adjustments.

For example, if you purchased stock for $5,000 and later sold it for $7,000, you would generally have a $2,000 capital gain.

On the other hand, if you sold that same investment for $4,000, you would generally have a $1,000 capital loss.

One important distinction is that gains and losses are generally not realized until an investment is sold. Changes in the value of investments you continue to hold typically do not create a capital gain or loss for tax purposes.

Short-Term vs. Long-Term Capital Gains

How long you hold an investment before selling it can make a significant difference in how your gains are taxed.

Short-Term Capital Gains

If you hold an investment for one year or less before selling it, any gain is generally considered short-term. Short-term capital gains are typically taxed at your ordinary federal income tax rates.

Long-Term Capital Gains

If you hold an investment for more than one year, the gain is generally considered long-term. Most long-term capital gains qualify for preferential federal tax rates of 0%, 15%, or 20%, depending on your taxable income and filing status.

Because these rates can differ significantly, the timing of an investment sale may affect your overall tax liability.

Certain assets and higher-income taxpayers may be subject to additional or different tax rules.

How Capital Losses Can Help Offset Gains

While investment losses are never ideal, realized capital losses in taxable accounts may help reduce the taxes owed on investment gains.

This strategy is commonly referred to as tax-loss harvesting.

For example, imagine you realized $8,000 in capital gains earlier this year but also sold another investment at a $3,000 loss.

That loss could potentially offset a portion of your gains, leaving you with a net capital gain of $5,000, assuming there are no other capital transactions or adjustments.

If your total allowable capital losses exceed your capital gains, you may generally be able to deduct up to $3,000 of the remaining net loss against other income each year ($1,500 if married filing separately).

Any unused capital losses can generally be carried forward to future tax years.

Be Aware of the Wash Sale Rule

Before selling an investment at a loss, it's important to understand the IRS wash sale rule.

A wash sale generally occurs when you sell a stock or security at a loss and purchase the same or a substantially identical investment within 30 days before or after the sale.

When this happens, the loss may not be deductible at that time.

For investors considering tax-loss harvesting, understanding this rule is important to avoid unintentionally losing an anticipated tax benefit.

What Should You Review Before December 31?

Year-end investment planning doesn't necessarily mean making major changes to your portfolio. Instead, it's an opportunity to evaluate your current position and identify any tax considerations before the year ends.

A few questions worth discussing with your tax or financial professional include:

• Have you realized capital gains this year? Reviewing investment sales can help you understand your potential tax liability.
• Do you have investments with unrealized losses? Certain losses may provide tax-planning opportunities if selling those investments also makes sense for your financial goals.
• How long have you held your investments? The difference between short-term and long-term treatment may influence the timing of a sale.
• Has your income changed significantly this year? Changes in income can affect your capital gains tax rate and overall tax situation.
• Are your investment and tax strategies working together? Tax considerations should be evaluated alongside your broader investment objectives, risk tolerance, and long-term financial plan.

For most individual taxpayers, capital gains and losses from sales in taxable accounts must generally be realized by December 31 to be included in the current calendar tax year.

Looking Ahead

Capital gains and losses are an important part of year-end tax planning, but they should not be considered alone.

An investment decision that provides a tax benefit today may not always be the best choice for your long-term financial goals.

At ClearPath, we believe tax planning and financial planning work best when they are considered together. Understanding how your investment activity affects your taxes can help you make more informed decisions as you prepare for the year ahead.

Have questions about how capital gains and losses may affect your 2026 taxes? Contact our team to discuss your year-end tax planning considerations. Give us a call at 913-336-3500 or email us at support@clearpath.email.

This information is intended for general educational purposes and should not be considered individualized tax, legal, or investment advice.