IRC 1(h): Long-Term Capital Gains and Qualified Dividends -- Preferential Rate Practitioner Guide

IRC 1(h) separates net capital gain and qualified dividend income from the ordinary income rate schedule and subjects them to lower, preferential rates. Without IRC 1(h), long-term capital gains and qualified dividends would be taxed at the taxpayer's ordinary income rate. This guide is written for enrolled agents, CPAs, and tax attorneys advising clients on capital gain recognition timing, qualified dividend treatment, rate planning, and the interaction of the preferential rates with the 3.8% NIIT under IRC 1411.

This guide covers the 0%/15%/20% rate tier structure, qualified dividend definition and holding period rules, long-term capital gain character rules, unrecaptured Section 1250 gain, collectibles gain, QSBS exclusion under IRC 1202, AMT interaction under IRC 55 and 56, state tax overlay, income stacking mechanics, OBBBA impacts, and open questions as of July 2026. The 3.8% NIIT overlay is addressed by cross-reference to the IRC 1411 NIIT guide on this site.

Section 1: Overview -- The IRC 1(h) Preferential Rate Framework

What IRC 1(h) Does

IRC 1(h) carves out two categories of income from the ordinary income rate schedule and subjects them to preferential rates: (1) net capital gain, defined as the excess of net long-term capital gain over net short-term capital loss for the taxable year, and (2) qualified dividend income as defined in IRC 1(h)(11). Without IRC 1(h), both categories would be taxed at ordinary income rates under the rate schedule applicable to the taxpayer's filing status. The preferential rate structure applies at the individual level and, under a separate lower-threshold structure, at the trust and estate level.

OBBBA Permanence

TCJA enacted the current three-tier preferential rate structure with a sunset after December 31, 2025. OBBBA (Pub. L. 119-21, signed July 4, 2025) made the TCJA preferential rate structure permanent by removing that sunset. Hedge the permanence conclusion to Pub. L. 119-21 and IRS.gov; verify current law at IRS.gov before advising any client.

The NIIT Overlay: IRC 1411 Was NOT Repealed

The 3.8% Net Investment Income Tax under IRC 1411 was NOT repealed by OBBBA. It applies in addition to the IRC 1(h) preferential rates for taxpayers whose MAGI exceeds the applicable threshold under IRC 1411(b). Practitioners must model the NIIT separately and not assume OBBBA's rate permanence affected IRC 1411. Hedge all NIIT analysis to IRC 1411 and IRS.gov. See the IRC 1411 NIIT guide on this site.

Section 2: The Three-Tier IRC 1(h) Rate Structure

IRC 1(h) provides three rate tiers for net capital gain and qualified dividends. The applicable rate depends on the taxpayer's total taxable income (ordinary income stacked first, then capital gain) relative to thresholds that differ by filing status. All thresholds must be verified at IRS.gov and in Rev. Proc. 2025-32, Sec. 3.03 for the applicable tax year. No dollar amounts are stated as authoritative in this guide.

Rate Tier Thresholds by Filing Status

The income thresholds that separate the 0%, 15%, and 20% capital gain rate tiers differ by filing status. Rev. Proc. 2025-32, Sec. 3.03 sets the 2026 thresholds for each filing status; verify all figures at IRS.gov before reliance. No dollar amounts are stated as authoritative in this guide. The filing status categories are:

• Married Filing Jointly (MFJ) and Surviving Spouse: The MFJ thresholds are the broadest, generally resulting in a wider 0% and 15% zone than for single filers. Verify the 2026 MFJ thresholds in Rev. Proc. 2025-32, Sec. 3.03 and at IRS.gov.
• Single: Single-filer thresholds are generally approximately half the MFJ thresholds. A marriage penalty can arise when both spouses have significant capital gain income and one or both would have had more favorable rate tier treatment filing separately. Verify the 2026 single thresholds in Rev. Proc. 2025-32, Sec. 3.03 and at IRS.gov.
• Head of Household (HOH): HOH thresholds fall between the single and MFJ thresholds. Verify in Rev. Proc. 2025-32, Sec. 3.03 and at IRS.gov.
• Married Filing Separately (MFS): MFS thresholds are generally half the MFJ thresholds. Verify in Rev. Proc. 2025-32, Sec. 3.03 and at IRS.gov.
• Estates and Trusts: Estates and trusts face the 20% capital gain rate at a substantially lower income level than individuals. The applicable threshold is tied to the top ordinary income tax bracket for trusts and estates under IRC 1(e), which is set annually. Verify the current estate and trust capital gain thresholds at IRS.gov and in Rev. Proc. 2025-32, Sec. 3.03. This is a critical planning point: a trust holding appreciated assets can reach the 20% rate tier at a fraction of the income that would trigger the same rate for an individual beneficiary.

The Income Stacking Mechanic

The rate tier applicable to capital gain is determined by stacking ordinary income first against the thresholds, then layering capital gain on top. Only the portion of capital gain that, when added to ordinary income, does not exceed the applicable threshold benefits from the lower rate. See Section 10 for the income stacking mechanics with an illustrative example.

Section 3: Qualified Dividend Income -- Definition and Holding Period Rules

The IRC 1(h)(11) Definition

"Qualified dividend income" is defined in IRC 1(h)(11). Hedge all analysis to IRC 1(h)(11) and IRS.gov. To receive the preferential capital gain rates on a dividend, the dividend must be paid by a qualifying corporation and the shareholder must satisfy the applicable holding period.

Qualifying Corporation Requirement

The dividend must be paid by a U.S. corporation or a qualified foreign corporation (QFC) as defined in IRC 1(h)(11)(C). A QFC is generally a foreign corporation whose stock or ADRs are readily tradable on an established U.S. securities market, or a foreign corporation eligible for the benefits of a comprehensive income tax treaty with the United States. Hedge QFC analysis to IRC 1(h)(11)(C) and IRS.gov.

The Holding Period Requirement

The shareholder must hold the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date, per IRC 1(h)(11)(B)(iii). Verify this day-count requirement at IRS.gov before applying it to any client. For preferred stock dividends corresponding to periods exceeding 366 days, the required holding period is more than 90 days during the 181-day period beginning 90 days before the ex-dividend date, per IRC 1(h)(11)(B)(iii)(II). Hedge the preferred stock rule to IRC 1(h)(11)(B)(iii)(II) and IRS.gov.

Excluded Dividends

Certain dividends do not qualify for the preferential rate even if paid by a qualifying corporation. Hedge each exclusion to IRC 1(h)(11)(B)(iii) and IRS.gov. Key excluded categories:

• Dividends paid by tax-exempt organizations (including certain REITs; verify at IRS.gov).
• Dividends on stock where the holding period requirement is not met.
• Dividends on stock where the shareholder is under an obligation to make related payments with respect to substantially similar or related property (short sale or equivalent position), to the extent the holding period is tolled.
• Deductible dividends paid on employer securities in an ESOP.
• Certain pass-through dividends where the underlying income does not support qualified dividend character.

Holding Period Tolling: Hedged Equity Positions

The required holding period is tolled (suspended) by derivative positions, short sales, and agreements to sell substantially identical stock. Any day on which the taxpayer has diminished risk of loss on the stock -- by reason of a put, an in-the-money call written, or an agreement to sell -- does not count toward the holding period for qualified dividend purposes. Hedge tolling rules to applicable IRC provisions and IRS.gov. Practitioners advising clients with hedged equity positions must review whether tolling disrupts qualified dividend status.

Section 4: Long-Term Capital Gain -- Holding Period and Character Rules

The More-Than-One-Year Holding Period

Long-term capital gain requires a holding period of more than one year. Hedge to IRC 1222(3) and IRS.gov. An asset held for exactly one year (365 days, not 366) is a short-term capital asset; its gain is short-term capital gain taxed at ordinary income rates. Short-term capital gain under IRC 1222(1) -- gain from assets held one year or less -- does not benefit from IRC 1(h) preferential rates. The transition from short-term to long-term character occurs on the day after the one-year anniversary of acquisition.

Character Determination: Asset-by-Asset

The long-term or short-term character is determined asset by asset. The netting rules under IRC 1222 determine the taxpayer's overall net capital gain position: long-term gains net against long-term losses first; short-term gains net against short-term losses first; then net short-term capital loss (if any) reduces net long-term capital gain. Only the resulting "net capital gain" (net LTCG over net STCL) benefits from the IRC 1(h) preferential rates. Hedge the netting rules to IRC 1222 and IRS.gov.

Holding Period Tolling: Wash Sales and Short Positions

When a loss is disallowed under IRC 1091 and added to the basis of the replacement security under IRC 1091(d), the holding period of the original security is tacked onto the holding period of the replacement security under IRC 1091(f). Short sales and certain straddle positions can also toll or otherwise affect holding period accrual. Cross-reference the IRC 1091 wash sale guide on this site.

Section 5: Unrecaptured Section 1250 Gain -- The 25% Maximum Rate

What Unrecaptured Section 1250 Gain Is

Unrecaptured Section 1250 gain is a subcategory of long-term capital gain taxed at a maximum rate of 25% per IRC 1(h)(6); verify at IRS.gov. It does not benefit from the 0%/15%/20% preferential rates. It represents the portion of gain on the sale of real property (IRC 1250 property) attributable to straight-line depreciation previously claimed, to the extent that depreciation has not already been recaptured as ordinary income under IRC 1250. See the IRC 1245 and 1250 depreciation recapture guide and the cost segregation and OBBBA bonus guide on this site for the full recapture framework.

OBBBA Bonus Depreciation and Unrecaptured Section 1250 Gain Exposure

OBBBA restored 100% bonus depreciation under IRC 168(k) for qualified property placed in service after December 31, 2024 (verify effective date and property definitions at IRS.gov). For real property subject to cost segregation studies, bonus depreciation accelerates deductions on reclassified personal property components (IRC 1245 recapture as ordinary income on sale) but does not change the straight-line depreciation accumulation on the IRC 1250 portion. The more total depreciation taken, the larger the recapture exposure on disposition: IRC 1245 ordinary income recapture on the bonus-depreciated components, plus unrecaptured Section 1250 gain at the 25% maximum rate on the IRC 1250 portion. Practitioners must model both before advising on real property sale timing. Hedge to IRC 1(h)(6) and IRS.gov.

Computation and Reporting

Unrecaptured Section 1250 gain is computed on the Unrecaptured Section 1250 Gain Worksheet in the Schedule D Instructions. It does not appear separately on Form 8949; it is reported through the Schedule D worksheet and the 25% maximum rate is applied through that computation. Hedge the computation to the current Schedule D Instructions and IRS.gov.

Section 6: Collectibles Gain -- The 28% Maximum Rate

What Constitutes Collectibles Gain

Long-term capital gain from the sale of collectibles is taxed at a maximum rate of 28% per IRC 1(h)(5); verify at IRS.gov. Collectibles are defined by reference to IRC 408(m), cross-referenced in IRC 1(h)(5), and include works of art, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages. Hedge the collectibles definition to IRC 408(m) and IRS.gov.

ETFs or mutual funds that hold precious metals may pass through collectibles gain character depending on the fund's structure. A fund treated as a grantor trust that holds gold bullion passes through collectibles gain character to the investor. Hedge any precious metal fund characterization to the specific fund's tax status and current IRS guidance.

Section 7: IRC 1202 Qualified Small Business Stock -- Exclusion and 28% Rate on Non-Excluded Gain

The IRC 1202 Gain Exclusion

IRC 1202 allows a non-corporate taxpayer to exclude from gross income all or a portion of the gain recognized on the sale of qualifying small business stock (QSBS) held for more than five years. This is a distinct provision from the IRC 1(h) preferential rate tiers: excluded QSBS gain is removed from gross income entirely and is not subject to any capital gain rate. Hedge all exclusion analysis to IRC 1202(a) and IRS.gov.

The exclusion percentage depends on when the QSBS was acquired. For qualified small business stock acquired after September 27, 2010, the exclusion percentage is 100% of the eligible gain under IRC 1202(a)(4); verify this percentage at IRS.gov and against IRC 1202(a). For stock acquired before that date, lower exclusion percentages (50% or 75%) may apply depending on the acquisition date; hedge to IRC 1202(a) and IRS.gov. No exclusion percentage stated in this guide should be treated as authoritative without verification at IRS.gov.

The Per-Issuer Gain Cap

The IRC 1202 exclusion is subject to a per-issuer gain cap. The eligible gain excluded is generally limited to the greater of $10 million or ten times the taxpayer's aggregate adjusted basis in the QSBS issued by that particular corporation. Hedge the per-issuer cap amounts to IRC 1202(b)(1) and IRS.gov; verify at IRS.gov before relying on any specific figure. OBBBA may have modified provisions relevant to the QSBS framework; verify current law at IRS.gov.

Non-Excluded Gain: The 28% Maximum Rate Under IRC 1(h)(4)

Gain from the sale of QSBS that is not excluded from income -- because the five-year holding period was not met, because the gain exceeds the per-issuer cap, or because the stock was acquired before the 100% exclusion was enacted -- may be subject to a maximum tax rate of 28% under IRC 1(h)(4). Hedge this rate to IRC 1(h)(4) and IRS.gov. The 28% rate applies in lieu of the standard 0%/15%/20% preferential rate tiers for the non-excluded QSBS gain.

Basic QSBS Qualification Requirements

QSBS treatment under IRC 1202 requires, among other conditions (hedge all to IRC 1202 and IRS.gov): (1) the stock was issued by a domestic C corporation; (2) the corporation was an active business in a qualifying trade or business (certain service businesses are excluded; verify at IRS.gov); (3) the corporation's aggregate gross assets did not exceed a specified threshold at the time of issuance (hedge the asset threshold to IRC 1202(d)(1) and IRS.gov); (4) the stock was acquired at original issue in exchange for money, property, or services; and (5) the taxpayer held the stock for more than five years.

Section 8: AMT and Capital Gains -- IRC 55 and IRC 56

LTCG and Qualified Dividends Are Generally NOT AMT Preference Items

Long-term capital gains and qualified dividends are generally not treated as tax preference items or adjustments under the Alternative Minimum Tax (AMT) and are not subject to the AMT add-back. A taxpayer with substantial LTCG and qualified dividend income does not face AMT solely because of that income: the income does not trigger an AMT adjustment under IRC 56 and is not a preference item under IRC 57. Hedge this conclusion to IRC 55, IRC 56, IRC 57, and IRS.gov; confirm the current treatment at IRS.gov before advising any client.

The AMT Exemption Phase-Out: AMTI Includes Net Capital Gain

Although LTCG and qualified dividends are not themselves AMT preference items, the Alternative Minimum Taxable Income (AMTI) base does include net capital gain for purposes of computing the AMT exemption phase-out. Under IRC 55, the AMT exemption is phased out for higher-income taxpayers. Because AMTI is a broad income base that includes net capital gain, a taxpayer with significant long-term capital gain may find that their AMTI exceeds the phase-out threshold, reducing the available AMT exemption. The practical effect is that a large capital gain event can increase AMT exposure -- not by being subject to an AMT add-back, but by triggering exemption phase-out and potentially exposing other items to AMT. Hedge the AMT exemption phase-out analysis to IRC 55(d)(3) and IRS.gov.

The IRC 1(h) Rate Also Applies Under the AMT

The IRC 1(h) preferential rates apply for purposes of both the regular income tax and the AMT. A taxpayer computing tentative minimum tax under IRC 55 applies the preferential capital gain rates on LTCG and qualified dividends rather than treating those amounts as ordinary income for AMT purposes. The result is that LTCG and qualified dividends are taxed at the same preferential rates under both the regular tax and the AMT computation. Hedge this treatment to IRC 55 and IRS.gov; verify at IRS.gov before relying on this principle in a specific client matter.

OBBBA and AMT

OBBBA made various changes to the individual income tax structure that affect the AMT analysis. The AMT exemption amounts and phase-out thresholds are set by current law and subject to inflation adjustment; verify the current figures at IRS.gov. Practitioners modeling capital gain scenarios for clients who may be subject to AMT should run the full AMT computation -- including any capital gain event's effect on the AMT exemption phase-out -- before advising on transaction timing. Hedge all AMT analysis to IRC 55 and IRC 56 and IRS.gov.

Section 9: State Tax Overlay -- Why Federal IRC 1(h) Rates Do Not Govern State Liability

Most States Do Not Conform to the Federal IRC 1(h) Preferential Rate Structure

The federal IRC 1(h) preferential rate structure is a federal income tax rule. Most states do not conform to it: they tax capital gains as ordinary income at the applicable state income tax rate, without any preferential rate for long-term gain or qualified dividends. A client who pays 15% federal tax on a long-term capital gain may owe state income tax on the same gain at the full state ordinary income rate, which in high-tax states can range well above 10%. Verify the capital gain treatment in the applicable state at the state's revenue authority. OBBBA's permanence of the federal preferential rate structure has no effect on state law.

States with Partial or Full Capital Gain Exclusions or Preferential Rates

A handful of states provide partial or full capital gain exclusions or preferential rates for certain types of capital gain. These state-level exclusions or preferential rates are entirely creatures of state law: they have their own definitional requirements (some states limit the exclusion to in-state business assets, farm property, or other qualifying assets), holding period requirements, and income limits. Practitioners must verify the applicable state law provisions at the relevant state revenue authority before advising any client on state capital gain planning. Hedge all state capital gain analysis to the applicable state law provisions and the relevant state revenue authority.

States with No Income Tax

Several states impose no state income tax and therefore impose no state-level tax on capital gains. Verify the current list of no-income-tax states at the applicable state revenue authority, as state tax laws can change. For clients considering a change of domicile before a large capital gain realization event, state income tax elimination can be a significant planning opportunity -- but domicile change planning requires careful analysis of state residency rules, and the timing of the gain recognition relative to the change of domicile is critical. Practitioners advising on domicile-based state tax planning should verify all applicable state rules at the relevant state authority.

Multi-State Issues: Where Capital Gain Is Sourced

For clients who live in one state but have capital gain from property located in another state (real property, business interests), the sourcing of capital gain for state tax purposes requires analysis of each state's rules. Most states source real property gain to the state where the property is located. Intangible property gain (stock, partnership interests) is typically sourced to the taxpayer's state of domicile, but exceptions exist. Practitioners should verify sourcing rules for each state with jurisdiction over the client's capital gain at the applicable state revenue authority.

Section 10: Income Stacking and Rate Planning Mechanics

The Income Stacking Rule Explained

The income stacking rule determines which capital gain rate tier applies by computing taxable income in two layers: ordinary income first, then capital gain on top. Capital gain is taxed at the rate tier corresponding to where it falls after the ordinary income layer has occupied the lower brackets. The result is that ordinary income "fills" the rate tiers from the bottom, and capital gain is taxed at whatever tier remains.

Key Rate Planning Levers

Ordinary Income Bracket Management

Retirement plan contributions (IRC 401(k), SEP-IRA, defined benefit plans), business deductions, and above-the-line deductions reduce the ordinary income base and expand the capital gain amount eligible for lower rate tiers. For business owners and partners with variable ordinary income, timing ordinary income recognitions around capital gain events is a primary planning strategy.

0% Rate Harvesting

Taxpayers whose total taxable income falls below the applicable 0% capital gain threshold (per Rev. Proc. 2025-32, Sec. 3.03; verify at IRS.gov) can sell appreciated assets and recognize long-term capital gain at zero federal income tax on the gain. Note that recognizing capital gain at 0% generally does not trigger NIIT under IRC 1411 if the taxpayer's MAGI is also below the IRC 1411 threshold; verify at IRS.gov. State tax may still apply; verify at the applicable state revenue authority.

Installment Sale Deferral Under IRC 453

Spreading capital gain recognition across multiple years through installment sale reporting under IRC 453 can reduce rate tier exposure by keeping annual taxable income below higher-rate thresholds. See the IRC 453 installment sale guide on this site.

Holding Period Extension

Waiting until the asset has been held for more than one year converts short-term gain (taxed at ordinary income rates) into long-term gain eligible for the IRC 1(h) preferential rates. The difference in effective rate can be substantial, particularly for high-income taxpayers.

Estate Planning Interaction: IRC 1014 Stepped-Up Basis

Under IRC 1014, heirs receive basis in inherited property equal to the fair market value at death, eliminating the decedent's built-in capital gain. OBBBA permanently set the estate exemption at $15 million per IRC 2010 (verify at IRS.gov). For estates under the exemption, the hold-until-death strategy eliminates both estate tax and capital gains tax on built-in appreciation. See the IRC 1014 and 1015 basis guide on this site.

NIIT Overlay Considerations

The 3.8% NIIT under IRC 1411 (not repealed by OBBBA; verify at IRS.gov) applies separately and in addition to the IRC 1(h) preferential rates for taxpayers above the applicable MAGI threshold. Hedge all combined-rate statements to the applicable IRC provisions and IRS.gov; no combined rate figure in this guide is authoritative without independent verification. See the IRC 1411 NIIT guide on this site.

Section 11: OBBBA Permanence and Related Impacts

TCJA Preferential Rate Structure Made Permanent

OBBBA (Pub. L. 119-21, signed July 4, 2025) removed the TCJA sunset, making the 0%/15%/20% rate tier structure under IRC 1(h) permanent. Hedge to Pub. L. 119-21 and IRS.gov; verify current law at IRS.gov before relying on permanence in any planning engagement.

No Direct OBBBA Changes to the Qualified Dividend Definition

OBBBA did not directly amend the qualified dividend definition in IRC 1(h)(11). The holding period requirements, the QFC definition under IRC 1(h)(11)(C), and the exclusions for non-qualifying dividends were not changed. Verify the current status of IRC 1(h)(11) at IRS.gov.

NIIT Not Repealed: IRC 1411 Continues

OBBBA did not repeal or modify IRC 1411. The 3.8% NIIT continues to apply on net investment income (including net capital gain and qualified dividends) for taxpayers above the applicable MAGI threshold. Hedge to IRC 1411 and IRS.gov.

Estate Exemption Interaction

OBBBA permanently set the estate and gift tax exemption at $15 million per individual (hedge to IRC 2010 and IRS.gov; verify at IRS.gov). For estates under the exemption, no estate tax plus IRC 1014 basis step-up eliminates capital gain on the built-in appreciation, making the hold-until-death strategy particularly compelling.

OBBBA Bonus Depreciation and Unrecaptured Section 1250 Gain

OBBBA extended 100% bonus depreciation under IRC 168(k) to qualified property placed in service after December 31, 2024 (verify effective date and property qualifications at IRS.gov). For real property investors using cost segregation studies, the increased depreciation deductions now mean a larger recapture stack on eventual sale. Practitioners must model the unrecaptured Section 1250 gain exposure before advising on real property sale timing. Hedge to IRC 1(h)(6) and IRS.gov.

Section 12: Open Questions as of July 2026

The following issues were unresolved as of July 2026. Monitor IRS.gov and official guidance for developments on each item before relying on any position.

Section 13: Compliance and Planning Checklist

Complete this checklist before filing any return with significant capital gain or qualified dividend income, and before providing advice on asset disposition timing. Each item is hedged to the applicable authority and IRS.gov.

1. Confirm holding period (long-term vs. short-term). Determine whether each capital gain or loss is long-term (more than one year, IRC 1222(3)) or short-term (one year or less, IRC 1222(1)). Confirm the exact acquisition date, any holding period adjustments from prior non-recognition transactions, and the correct disposition date. Hedge to IRC 1222 and IRS.gov.
2. Identify the character of each gain or loss. Classify each item as: standard long-term capital gain (0%/15%/20% under IRC 1(h)(1)(B)/(C)/(D)); unrecaptured Section 1250 gain (max 25%, IRC 1(h)(6)); collectibles gain (max 28%, IRC 1(h)(5)); QSBS gain, excluded portion (IRC 1202(a)) or non-excluded portion subject to 28% max (IRC 1(h)(4)); or short-term capital gain (ordinary income rates). Hedge each classification to the applicable IRC subsection and IRS.gov.
3. Identify the taxpayer's filing status and apply the correct thresholds. The 0%, 15%, and 20% capital gain rate thresholds differ by filing status. Verify the 2026 thresholds for the applicable filing status in Rev. Proc. 2025-32, Sec. 3.03 and at IRS.gov. Estates and trusts reach the 20% rate at a substantially lower income level than individuals.
4. Apply the income stacking rule. Stack ordinary income first against the filing-status-specific thresholds, then capital gain on top. The applicable rate tier depends on where the capital gain falls after the ordinary income stack. Verify all thresholds at IRS.gov and Rev. Proc. 2025-32, Sec. 3.03.
5. Verify qualified dividend status for each dividend. For each dividend in Form 1099-DIV box 1b: (a) confirm the paying corporation is a U.S. corporation or QFC under IRC 1(h)(11)(C); (b) confirm the holding period under IRC 1(h)(11)(B)(iii) was met (preferred stock: IRC 1(h)(11)(B)(iii)(II)); and (c) confirm no tolling position (short sale, put, agreement to sell) disrupted the holding period. Hedge to IRC 1(h)(11) and IRS.gov.
6. Check for IRC 1411 NIIT exposure. The NIIT under IRC 1411 was NOT repealed by OBBBA. For clients whose MAGI may exceed the applicable threshold under IRC 1411(b), compute NIIT exposure on net investment income (including net capital gain and qualified dividends). Report on Form 8960. Hedge to IRC 1411 and IRS.gov. See the IRC 1411 NIIT guide on this site.
7. For real property sales, compute unrecaptured Section 1250 gain. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D Instructions. Identify total depreciation on the IRC 1250 property, including straight-line depreciation on cost-segregated components that remained as real property. Apply the 25% maximum rate under IRC 1(h)(6). Hedge to IRC 1(h)(6), the Schedule D Instructions, and IRS.gov.
8. For QSBS, verify IRC 1202 qualification before applying the exclusion. Confirm five-year holding period, C corporation status, active business requirement, gross asset threshold at issuance, and original issue acquisition (all hedge to IRC 1202 and IRS.gov). Apply the exclusion percentage per IRC 1202(a) (verify at IRS.gov). Apply the per-issuer cap per IRC 1202(b)(1) (verify at IRS.gov). For non-excluded gain, apply the 28% maximum rate under IRC 1(h)(4). See the IRC 1202 QSBS guide on this site.
9. Run the AMT computation for clients with large capital gain events. LTCG and qualified dividends are generally not AMT preference items (hedge to IRC 55, 56, 57, and IRS.gov), but a large capital gain event can push AMTI above the exemption phase-out threshold under IRC 55(d)(3), reducing the AMT exemption and potentially exposing other income to AMT. Run the full AMT computation for any client with a single large capital gain realization. Hedge to IRC 55 and IRC 56 and IRS.gov.
10. Compute state capital gain tax liability separately. Most states do not conform to federal IRC 1(h) preferential rates and tax capital gains as ordinary income at state rates. OBBBA permanence has no effect on state law. Verify state treatment at the applicable state revenue authority. Account for state tax in the total effective rate presented to the client.
11. Consider installment sale reporting under IRC 453. For clients facing rate tier acceleration from a large lump-sum capital gain, evaluate IRC 453 installment reporting to spread gain recognition over multiple years. Cross-reference the IRC 453 guide on this site.
12. Model the "hold until death" strategy for highly appreciated assets. For clients with estates under the OBBBA exemption ($15 million per IRC 2010; verify at IRS.gov), the IRC 1014 stepped-up basis eliminates the built-in capital gain entirely at death. Compare the hold-until-death outcome against current sale after tax to determine the most efficient disposition strategy. Cross-reference the IRC 1014 and 1015 basis guide on this site.
13. Monitor IRS.gov for annual threshold updates and pending guidance. Rev. Proc. 2025-32, Sec. 3.03 sets 2026 thresholds; a subsequent revenue procedure will govern 2027 and later years. Monitor IRS.gov for QSBS guidance, AMT exemption adjustments, NIIT threshold clarifications, and any OBBBA-related corrections. Verify all figures at IRS.gov before use in planning computations.

Section 14: Practitioner Claims and Verification Notice

The following table identifies specific claims made in this guide, their statutory authority, and the required verification source. No claim is authoritative without independent verification at IRS.gov and against the cited authority.

Frequently Asked Questions

Common questions from enrolled agents, CPAs, and tax attorneys advising on IRC 1(h) capital gain rate planning and qualified dividend treatment.

Tax Software for Capital Gain and Investment Income Returns

Americas Tax has supported enrolled agents, CPAs, and tax attorneys handling Form 8949, Schedule D, unrecaptured Section 1250 gain, qualified dividend analysis, QSBS exclusion, and NIIT computations since 2001. Our team understands the full IRC 1(h) rate planning framework and the OBBBA permanence changes that affect every capital gain engagement.