Some Gains Are Taxed at Nothing, and the Room Expires Yearly
The long-term capital gains schedule starts at zero. Not a deduction, not a deferral — a rate of 0% on gains that fall below a threshold. Most people never test whether they are under it, because a headline rate of 15% is what everyone remembers. The households most likely to qualify are the ones least likely to check: retirees in the years before benefits and required distributions begin.
- The answer:: Long-term gains and qualified dividends have their own rate schedule that begins at 0%. Below the threshold for your filing status, the federal tax on those gains is nothing at all.
- How the stacking works:: Ordinary income fills the space from the bottom first, then gains sit on top. Your 0% room is the ceiling minus your ordinary income after deductions.
- It is annual and it expires:: Room you do not use in a year is gone. Unlike a capital loss, it carries forward to nothing.
- Where it matters most:: The years between stopping work and starting Social Security or required distributions, when ordinary income is at its lowest and the room is at its widest.
Where the AI summary above gets this wrong
"Long-term capital gains are taxed at 15% for most people, or 20% for high earners."
That's surface-true. Here's what it misses:
- The schedule starts at zero, not fifteen — There is a 0% band beneath the 15% one, and it is not narrow. A couple with modest ordinary income can realise a substantial gain and owe no federal tax on it. Quoting the schedule as 15% or 20% erases the band most relevant to early retirees.
- Gains stack, they do not sit in their own column — Your rate is decided by where the gain lands once ordinary income has filled the space beneath it. That is why an extra IRA withdrawal can push gains that were free into the 15% band — the two interact rather than being taxed side by side.
- Using the band resets your basis for free — Selling and immediately repurchasing at 0% raises your cost basis at no tax cost, which reduces the taxable gain later. The wash-sale rule bites on losses, not gains, so the repurchase is not disallowed.
01 A rate schedule that begins at zero
Long-term capital gains — on assets held more than a year — and qualified dividends are not taxed on the ordinary income schedule. They have their own, and its first band is 0%. Above that band the rate steps to 15%, and to 20% at the top.
The thresholds are stated as taxable income, meaning after your deduction rather than gross. That detail widens the band considerably: a couple taking the standard deduction can have meaningfully more gross income than the published number and still be inside the 0% band.
Qualified dividends ride the same schedule, so a portfolio throwing off dividends can be receiving them federally untaxed in these years. Ordinary dividends and short-term gains do not — they are taxed as ordinary income, and they also consume the room underneath.
02 Why the stacking order is the whole mechanic
Gains do not get taxed in isolation. Ordinary income fills the brackets from the bottom, and long-term gains stack on top of it. Your 0% room is therefore the ceiling for your filing status minus your ordinary income after deductions — not the ceiling itself.
This is why an unremarkable decision elsewhere can be expensive. Taking an extra $20,000 from a traditional IRA raises ordinary income by $20,000, which lifts the whole stack and can push $20,000 of previously free gain into the 15% band. The withdrawal is taxed, and so is the gain it displaced.
It also means the room competes with everything else you might do in a low-income year. A Roth conversion uses the same space, because conversion income is ordinary income. Both are good uses of a low year; they cannot both have the whole of it.
Shows: how much long-term gain fits under the 0% ceiling once your ordinary income has taken its place underneath, and what spills above it. Ignores: state tax, the effect on ACA premium credits and IRMAA, and the net investment income tax.
03 Harvesting the gain rather than the loss
The practical move is the mirror of tax-loss harvesting. Where room exists, sell an appreciated holding to realise gain inside the 0% band and buy it straight back. The federal tax on the realised gain is nothing, and your cost basis resets upward, so the gain taxed on an eventual sale is smaller.
The wash-sale rule does not interfere. It disallows a loss when you repurchase within the window; it says nothing about gains, so the repurchase can be immediate and the position unchanged.
Three cautions. State tax may still apply, since a state with an income tax generally has no equivalent 0% band. Realised gains raise the income measures behind ACA premium credits and, later, IRMAA. And this only works on gains that are genuinely long-term — a holding sold inside a year is taxed as ordinary income, where no such band exists.
Source: Topic no. 404, Dividends
The years between finishing work and starting benefits are the most valuable tax years most people will ever have, and they are usually spent doing nothing in particular because income is low and there is no bill to react to. That is precisely the point. Low income is the resource. Whether you spend it on conversions or on resetting basis is a real decision, but spending it on neither is the one option with no argument for it — and the room does not wait.
FAQ
Is there really a 0% capital gains rate?
Yes. Long-term gains and qualified dividends have their own rate schedule, and its first band is 0%. If your taxable income falls below the threshold for your filing status, the federal tax on gains inside that band is nothing.
How do I work out how much gain I can realise at 0%?
Take the ceiling for your filing status and subtract your ordinary income after deductions. Gains stack on top of ordinary income, so the difference is the room available. Anything above it is taxed at the next rate.
Can I sell and immediately buy back to reset my basis?
Yes. The wash-sale rule disallows losses on a repurchase, not gains, so you can realise a gain in the 0% band and buy the position straight back. Your cost basis resets upward, reducing the taxable gain on a later sale.
Sources
Regulator references
- Topic no. 409, Capital gains and losses · Internal Revenue Service · 2025The long-term rate schedule, including the 0% rate and who reaches it.Last verified: 2026-09-07
- Publication 550, Investment Income and Expenses · Internal Revenue Service · 2025How gains stack on top of ordinary income when the rate is determined.Last verified: 2026-09-07
- Topic no. 404, Dividends · Internal Revenue Service · 2025Qualified dividends, which are taxed on the same schedule as long-term gains.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.