Long-term capital gains (assets held over a year) are taxed at preferential rates: 0%, 15%, or 20% depending on income, plus a 3.8% Net Investment Income Tax for high earners. Short-term gains are taxed as ordinary income.
Two structural features generate ongoing debate:
- Stepped-up basis at death lets heirs inherit assets at fair market value — eliminating capital-gains tax on appreciation that occurred during the decedent's lifetime.
- Unrealized gains are not taxed at all under current law. Proposals (Biden's "billionaire minimum tax," Wyden's Mark-to-Market) would tax unrealized appreciation for the ultra-wealthy.
Defenders argue preferential rates reward investment and avoid double-taxation. Critics argue they primarily benefit the wealthy and erode the income-tax base.