Can My Capital Gains Push Me Into a Higher Tax Bracket?

It’s nice to see the total value of your investments growing over time, but are you aware that significant growth can put you in a higher tax bracket? This is one way that many people end up owing a lot more tax than they anticipate. Long-term capital gains can’t push you into a higher tax bracket, but short-term capital gains can. Understanding how capital gains work could help you avoid unintended tax consequences. If you’re seeing significant growth in your investments, you may want to consult a financial advisor.

How Tax Brackets Work

Federal and state tax brackets determine the tax rate you pay on different portions of your taxable income. You can consider them to be like a series of fiscal steps: The more you earn, the higher you climb; and consequently, the higher the tax rate is that you pay.

There are seven federal tax brackets, each with a maximum tax rate that corresponds to your income and filing status. Here are the income thresholds for the 2025 tax year: 

Trump’s tax plan, otherwise known as the “One Big Beautiful Bill,” retains these tax brackets and makes them permanent. The OBBB also ensures that income thresholds for each tax bracket will continue to be adjusted for inflation, and allows an extra inflation adjustment for the 10%, 12% and 22% brackets, starting in 2026.

Your marginal tax reflects the highest tax rate you pay on the last dollar of income. Your effective tax rate, meanwhile, is the average tax rate that applies to all the income you earn. In a progressive tax system, your effective tax rate is typically lower than your marginal rate, as it accounts for income in lower tax brackets.

Understanding where you land in the tax bracket range is important for estimating your tax liability. It can also make a difference in how much you’ll owe if you’re including capital gains in your taxable income calculations.

What Qualifies as a Capital Gain?

Capital gains are the net increase of your investments, meaning what you make above what you spend to purchase that investment. For example, suppose you purchased a stock for $50 and sold it later for $100. The additional $50 you earned is your capital gain.

These gains, profits from your investments or sale of assets like stocks, bonds or property, come under the purview of the capital gains tax. The IRS applies the capital gains tax based on how long you hold an investment before selling it.

• Long-term capital gains tax applies to investments held longer than one year.
• Short-term capital gains tax applies to investments held for less than one year.

A capital loss occurs when you sell an investment for less than what you paid for it. Capital losses can be used to offset taxes owed on capital gains through a process called tax loss harvesting.

Do Capital Gains Count as Income?

Capital gains are generally counted as taxable income in the eyes of the IRS. The rate at which they’re taxed is determined by whether you’re reporting a short or long-term capital gain.

Short-term capital gains are taxed as ordinary income, according to your tax bracket. Long-term capital gains are taxed at 0%, 15% or 20%, depending on your income and filing status. 

Here are the long-term capital gains tax income thresholds for 2025:

What Is the Capital Gains Bump Zone?

The capital gains bump zone refers to the range of income where a substantial short-term capital gain could tip you into a higher tax bracket, and therefore increase your tax rate.

For example, if you’re in the 22% tax bracket and a $10,000 short-term capital gain inflates your income to enter the 24% tax bracket, you’ll end up paying a higher tax rate on the portion of income in the 24% bracket. A clear understanding of this dynamic can help you anticipate and prevent potential tax pitfalls.

How Capital Gains Can Influence Other Parts of Your Tax Return

Realizing capital gains doesn’t just affect how much you pay in taxes on the gain itself. It can also increase your total income in a way that impacts other areas of your tax return, sometimes creating additional costs that aren’t immediately obvious.

Social Security Taxation

If you’re collecting Social Security, adding capital gains—especially large short-term gains—can raise your income enough to make more of your benefits taxable. This happens when your total income, including half your Social Security benefits, crosses certain IRS thresholds. For 2025, you may owe taxes on up to 85% of your benefits if you’re single and your combined income exceeds $25,000, or you’re married filing a joint return and your combined income exceeds $32,000.

Medicare Premium Surcharges

Higher income can also trigger higher Medicare costs. Medicare uses your modified adjusted gross income (MAGI) from two years prior to determine whether you’ll pay more for Part B and Part D. If capital gains push your income above certain thresholds, you could face higher monthly premiums for a full calendar year.

Loss of Credits or Deductions

Some tax credits and deductions are phased out as income rises. If capital gains boost your income above a limit, you could lose access to credits like the retirement savings contributions credit or education-related tax benefits. In some cases, this could result in a higher overall tax bill than expected—even if your gains are long-term and taxed at a lower rate.

Additional Investment Tax

If your income is above certain limits, you may also owe an extra tax on investment income—commonly known as the Net Investment Income Tax (NIIT). This applies an extra 3.8% tax on capital gains and other investment income once you pass the income threshold ($200,000 for single filers, $250,000 for married couples filing jointly).

These ripple effects highlight the importance of reviewing how investment gains fit into your full tax picture. Planning the timing of sales and using tools like tax-loss harvesting can help reduce the impact on other parts of your return.

Tips for Lowering Your Capital Gains Tax

While lowering your capital gains tax may seem challenging, various strategies can come to your rescue. Here are a few tips you may consider to reduce your tax bill.

• Hold on to assets for longer than one year to lock in lower, long-term capital gains tax rates. 
• Harvest losses to counterbalance gains in your taxable brokerage account.
• Hold less tax-efficient investments in a tax-advantaged vehicle, like a traditional or Roth IRA. 
• Reduce your taxable income for the year by contributing to a 401(k) plan or a similar tax-advantaged retirement plan at work.

Talking to a financial advisor can help you develop a customized tax strategy for managing capital gains efficiently.

Bottom Line

Knowing when capital gains could trigger additional taxes by pushing you into a higher tax bracket is key for your investment portfolio. That’s why you should take note: While long-term capital gains can’t push you into a higher tax bracket, short-term capital gains could.

Tips for Tax Planning

• Getting pushed into a higher tax bracket can be devastating for you if you’re not prepared for it. Plus, there may have been plenty you could do to avoid that higher tax. A financial advisor who specializes in tax strategies could help you prepare for all of these things and help you manage your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you anticipate receiving some capital gains this year, you can use SmartAsset’s free capital gains calculator to help you estimate what you might owe.

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