How Some Retirees Pay 0% Tax on Investment Gains

When many people hear the words "capital gains tax," they assume they'll owe 15% or 20% of the profits in taxes if the investment was owned outside of a retirement account for over one year before it was sold.

But many retirees are surprised to learn there's actually a 0% federal long-term capital gains tax bracket that may not have applied while you were working, but may during retirement if taxable income is low enough.

In the right circumstances, you may be able to sell appreciated investments, pay no federal capital gains tax, and even repurchase the investment immediately to increase your tax basis for the future.

How Does the 0% Capital Gains Tax Work?

Investments held for more than one year outside of retirement accounts generally qualify for long-term capital gains treatment (capital gains don't apply to retirement accounts such as IRAs, 401k plans, and 403b plans).

Unlike wages or IRA withdrawals, long-term capital gains are taxed using their own set of tax brackets.

For 2026, the 0% federal long-term capital gains tax bracket generally applies to taxpayers with taxable income up to:

Filing Status	Top of 0% Long-Term Capital Gains Bracket
Single	$49,450
Married Filing Jointly	$98,900

Once your taxable income exceeds those thresholds, additional long-term capital gains generally move into the 15% capital gains tax bracket until much higher income levels are reached.

Here's the full long-term capital gains tax brackets for 2026:

The 0% Bracket Is Graduated

One of the biggest misconceptions is that if your capital gains exceed the 0% threshold, all of your gains suddenly become taxable at 15%.

Fortunately, that's not how it works.

Just like the ordinary income tax brackets, the long-term capital gains tax brackets are graduated.

Only the portion of your gains that exceeds the top of the 0% bracket is taxed at the higher rate.

A Simple Example

Let's assume Tom and Mary are retired.

After accounting for deductions, their projected taxable income before realizing any long-term capital gains is $70,000 which includes social security benefits, a pension, interest income, and some Traditional IRA disbursements.

Because the top of the 0% long-term capital gains bracket for married couples is $98,900, they have approximately $28,900 of room remaining in the 0% bracket.

Suppose they decide to realize $40,000 of long-term capital gains.

Here's how those gains would be taxed:

• First $28,900 → 0% federal capital gains tax

• Remaining $11,100 → 15% federal capital gains tax

  
  

In other words, crossing into the 15% long-term capital gains tax bracket doesn't cause all of your gains to be taxed at 15%. Only the portion above the threshold is taxed at the higher rate, meaning a portion of gains are still taxed at 0%.

Why Would You Sell If You Still Want the Investment?

This is the part that surprises many people.

Many investors assume they should only sell investments when they need the money.

However, during lower-income years, intentionally realizing long-term capital gains may actually be a smart tax planning strategy.

Unlike tax-loss harvesting, the wash sale rule does not apply to gains.

That means you can:

• Sell an investment.

• Realize the gain.

• Potentially pay 0% federal tax on that gain if you qualify as stated above.

• Immediately repurchase the investment.

You still own the same investment. But now you've increased your cost basis.

The result is that if you eventually sell the investment years from now, a portion of the appreciation has already been recognized tax-free, reducing future taxable gains.

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

Interaction With Other Components Of Tax Planning

While the 0% capital gains bracket can create valuable planning opportunities, it's important to look at the entire tax picture before deciding how much gain to realize.

For example, realizing capital gains may also:

• Increase the taxable portion of your Social Security benefits.

• Increase your state income taxes, depending on where you live.

• Reduce the amount of room available for Roth conversions while staying within your desired tax bracket.

• Increase your Modified Adjusted Gross Income (MAGI), which could affect future Medicare IRMAA premiums if income becomes high enough.

That's why the decision should always be evaluated as part of your overall retirement tax plan rather than in isolation.

The Best Years to Consider This Strategy

Many retirees have some years after they stop working but before Required Minimum Distributions (RMDs) begin.

Those years often present unique tax-planning opportunities because taxable income may be temporarily lower than it will be later in retirement.

During those lower-income years, it may make sense to:

• Harvest capital gains at the 0% rate when possible.

• Make progress on Roth conversions.

• Reposition investments more tax-efficiently.

Every situation is different, but these years can be among the most valuable for proactive tax planning.

The Bottom Line

Many retirees spend years trying to avoid paying capital gains taxes.

Especially retirement, some may be able to pay 0% on some of their long-term capital gains each year by understanding how the 0% long-term capital gains tax bracket works.

The goal isn't necessarily to avoid realizing gains forever.

Instead, it's recognizing that there may be years when realizing gains is actually the most tax-efficient move you can make.

Like many retirement planning opportunities, success often comes down to timing.

With thoughtful planning, the tax code sometimes rewards you not for avoiding taxes, but for realizing income in the right year.

Want To Discuss This Individually?

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2 - For non-clients: Complete the form on the website to request a retirement planning consultation: www.rolekretirement.com

This article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor.