Investors with moderate incomes who sell stocks, mutual funds, or other assets held longer than a year can owe zero federal tax on the resulting gains. The IRS sets explicit taxable-income ceilings for this zero-rate bracket, and those ceilings rise each year with inflation. For tax year 2026, the agency has already published the updated thresholds, widening the window for filers who time their sales carefully.
How inflation indexing expands the zero-rate capital gains bracket
The federal tax code taxes long-term capital gains at three possible rates: 0%, 15%, or 20%. Which rate applies depends on a filer’s taxable income after deductions, not gross income. A 0% rate covers most net capital gain when taxable income falls at or below specified thresholds, according to the IRS discussion in capital gains. The statutory authority for this tiered structure sits in Section 1(h) of the Internal Revenue Code.
Each year, the IRS adjusts those dollar thresholds for inflation using a chained consumer price index. The result is a bracket ceiling that creeps higher even when Congress takes no action. For tax year 2026, the agency released the new figures in Revenue Procedure 2025-32, published inside Internal Revenue Bulletin 2025-45. That document contains a “Maximum Capital Gains Rate” table listing the exact taxable-income limits by filing status for both the 0% and 15% brackets.
The practical effect is straightforward. A married couple filing jointly whose taxable income, including gains, stays at or below the listed ceiling pays no federal tax on those long-term gains. Retirees drawing Social Security, modest pension income, and small portfolio withdrawals often land in this zone. Younger investors with fluctuating earnings can also benefit by realizing gains in years when their income dips. As the ceiling rises with inflation, households that previously sat just above the cutoff can slip below it without changing their behavior.
Indexing also matters for investors with sizable unrealized gains. By spreading sales over several calendar years and watching how the inflation-adjusted thresholds move, they may be able to realize portions of their gains at a 0% rate, then pay higher rates only on the remainder. In effect, the moving ceiling creates a planning opportunity for those willing to coordinate investment decisions with their broader income picture.
IRS documents and statutory rules that set the zero-rate ceiling
Three layers of official guidance define how the 0% bracket works in practice. The first is the statute itself. Under 26 U.S. Code Section 1(h), Congress established the preferential rate structure for net capital gains and directed the Treasury to index certain thresholds annually. The second layer is the revenue procedure. Rev. Proc. 2025-32 translates the statutory formula into concrete dollar amounts for a specific tax year, giving taxpayers and preparers the numbers they need for planning.
The third layer is the return-level instructions. The IRS explains in the Schedule D instructions for Form 1040 when filers must use the Schedule D Tax Worksheet versus the Qualified Dividends and Capital Gain Tax Worksheet to determine whether their gains qualify for the zero rate. Those worksheets walk taxpayers through combining ordinary income, qualified dividends, and long-term gains, and then applying the appropriate rate schedule. Even when the 0% bracket technically applies, the worksheets ensure that only the portion of gain falling below the ceiling receives that rate.
A Congressional Research Service analysis, CRS Report R47113, traces the history of preferential capital gains treatment and examines distributional effects. That report explains how the bracket was designed to reduce the tax burden on modest investment returns while higher earners face additional levies, including the 3.8% net investment income tax that applies above separate income thresholds. Together, the statute, annual revenue procedures, and filing instructions create a layered framework that determines who can benefit from the 0% rate in any given year.
Gaps in the data on who actually claims the zero rate
No publicly available IRS Statistics of Income table breaks out how many returns claim the 0% long-term capital gains rate in a given year, or how those filers are distributed across age, geography, and asset type. Instead, researchers must infer usage from broader income and gains categories. Aggregate tables show how many filers report net capital gains and how much tax they pay overall, but they do not isolate the subset whose gains fall entirely inside the 0% bracket.
This data gap limits policymakers’ ability to evaluate how well the zero-rate ceiling targets its intended population. For example, retirees with modest savings and low taxable income are clear beneficiaries in theory, yet there is no direct public tabulation of how many such households actually realize gains in a way that captures the full benefit. Similarly, there is little visibility into whether the bracket disproportionately helps investors with volatile self-employment income who strategically time asset sales in low-earning years.
More granular disclosure could clarify whether the 0% rate primarily functions as relief for small investors, a planning tool for higher-income households in temporarily low-income years, or some mix of both. Until then, analysts must rely on indirect evidence and microsimulation models to estimate who occupies the expanding zero-rate band as inflation nudges the thresholds higher.
