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Ask The Tax Editor, July 3: Tax Questions For Investors

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at five tax questions for investors, including queries on capital gains and qualified small business stock. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. 0% capital gains rate

Question: I generally have about $60,000 of taxable income from pensions and other sources of ordinary income when I file my tax return. However, this year I sold a large investment, generating a $150,000 long-term capital gain. I am married and file a joint return. Will any of my capital gains be taxed at the 0% capital gains rate?

Joy Taylor: For 2026, if taxable income other than long-term capital gains and qualified dividends doesn’t exceed $49,450 for single-filed returns, $66,200 on head-of-household returns or $98,900 on joint returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

In your situation, it appears that part of your capital gains would be taxed at the 0% capital gains rate and the rest at the 15% capital gains rate. Based on your facts, you would have $210,000 of taxable income ($60,000 of ordinary income and $150,000 of long-term capital gains). $38,900 ($98,900 - ($210,000 - $150,000)) of your long-term capital gain would get the 0% rate and $111,100 is taxed at the 15% rate.

Note that although these 0%-rate capital gains might not be taxed at the federal level, they do increase your adjusted gross income. Also, capital gains may be taxed differently at the state level. For example, some states tax capital gain as ordinary income.

2. Stock mutual funds and capital gains distributions

Question: I invest in stock mutual funds. Every year, I pay a lot of tax on capital gains distributions from these funds at ordinary income tax rates. I’m told by my accountant that this income doesn’t qualify for the lower tax rates on long-term capital gains. Why is this the case?

Joy Taylor: Net short-term capital gains are taxed at ordinary income rates up to 37%. This applies to gains from the sale or exchange of capital assets held for a year or less, which can include capital gains distributions from stock mutual funds. Some of these funds frequently buy or sell holdings that can potentially generate big short-term capital gains distributions.

Before you invest in a stock mutual fund, check its turnover ratio. The higher the ratio, the higher the potential for tax-inefficient short-term capital gains distributions.

One way around this hazard is to keep high-turnover stock mutual funds in an IRA or another tax-deferred account instead of in a taxable investment account.

3. Qualified small business stock

Question: I keep reading about tax breaks for owners of qualified small business stock. Can you explain the tax benefits and rules?

Joy Taylor: This tax break is generally for people who invest in a start-up corporation and then sell their stock at a gain several years later.

The main tax benefit is 100% gain exclusion for many investors when they sell. Individuals who acquire qualified small business stock (QSBS) after Sept. 27, 2010, and sell more than five years later, can exclude 100% of their capital gains from the sale. The amount of the excludable gain is capped at the greater of 10 times your stock basis or $10 million ($15 million for QSBS bought after July 4, 2025). The gain exclusion is 50% or 75% for QSBS that you acquired between August 11, 1993, and September 27, 2010.

Last year's "One Big Beautiful Bill" gives a partial exclusion for QSBS bought after July 4, 2025, and held less than five years before the sale date. It's 50% for QSBS sold after three years and 75% for QSBS sold after four years.

There are many QSBS requirements. Here are the main ones:

Only stock in a regular C corporation qualifies. Stock in an S corporation is not eligible.
You must acquire the shares in an original issuance from the corporation. Stock bought from an existing shareholder or in a secondary market doesn't count.
The corporation must be a qualified small business when you acquire the stock. The firm's gross assets at the time of the stock issuance and immediately thereafter cannot exceed $50 million ($75 million for QSBS acquired after July 4, 2025).
There is an active trade or business rule. At least 80% of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses.
Stock of corporations in certain lines of business doesn't qualify as QSBS. Those businesses include banking, leasing, insurance, financing, investing, hotels, restaurants, oil and gas, and farming. Also excluded are personal service businesses in the fields of health, law, engineering, architecture, accounting, consulting, brokerage and more.

4. One Big Beautiful Bill

Question: Did last year's "One Big Beautiful Bill" make any changes to the taxation of capital gains or losses?

Joy Taylor: The OBBB, which was enacted a year ago on July 4, 2025, made many tax changes for individuals, estates, businesses and nonprofits. But there were not big changes to capital gains taxation.

Some Republican lawmakers and free-market groups backed the idea of indexing capital gains to inflation each year, but this didn't make it into the final law. Others wanted a 15% top federal capital gains tax rate. This proposal also was not included.

5. Investing in gold

Question: I am thinking of investing in gold. If I buy the physical product, will any gains when I sell get the favorable capital gains tax rates? Is the answer different if I invest in an exchange-traded fund?

Answer: The tax law treats physical holdings in precious metals, such as gold, silver, platinum, etc., as collectibles. This is true whether you hold coins, bars, ingots or other forms of physical holdings.

When you sell, your gain or loss is the difference between the selling price and your cost basis in the metal. Most people who sell will have capital gain or loss. Capital gains from the sale of precious metals held over a year are taxed at a capital gains rate of up to 28%. Capital gains from the sale of precious metals held for a year or less are taxed at ordinary income rates. If you sell for a loss, then you will have a capital loss.

If you invest in an exchange-traded fund that holds gold or silver in physical form, and you sell your interest over a year later, then your gain will often be taxed at a top 28% tax rate, similar to if you outright owned the physical gold and sold it. The 0%, 15% or 20% capital gains rates generally don't apply because you are treated as holding a collectible.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not, and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.