Net Investment Income Tax (NIIT) in 2026: When $100,000 in Capital Gains Adds a $3,800 Surcharge to a $250,000 Household Income

The 3.8% surtax most households don’t see coming

The Net Investment Income Tax is a flat 3.8% surtax on investment income for taxpayers above specific MAGI thresholds. It was created by the Affordable Care Act in 2010, took effect January 1, 2013, and is codified at IRC §1411. The revenue funds Medicare — but unlike Medicare payroll tax, NIIT applies to passive and investment income, not wages.

The part most people miss: the MAGI thresholds — $200,000 for single filers, $250,000 for married filing jointly, $125,000 for married filing separately — have never been adjusted for inflation. Not once since 2013. Federal income tax brackets move every year under IRC §1(f). NIIT thresholds don’t. In 2013, a $250,000 MFJ household was solidly upper-income. In 2026, that same nominal income buys roughly 22% less. Bracket creep is pulling more middle-upper-income households into NIIT exposure every single year.

Who owes it: the two-part test under IRC §1411

NIIT is calculated as 3.8% of the lesser of:

1. Your net investment income (all investment income minus investment expenses), OR
2. The amount by which your MAGI exceeds the threshold ($200K single / $250K MFJ / $125K MFS)

Both conditions must be met. If your MAGI is $300,000 (MFJ) and your net investment income is $80,000, the NIIT applies to the lesser of $80,000 or $50,000 (the $300K − $250K excess). You owe 3.8% × $50,000 = $1,900 — not 3.8% of the full $80,000.

This “lesser of” mechanic means NIIT can hit for as little as a few hundred dollars when you barely cross the threshold, then scales up as income grows.

What counts as net investment income — and what doesn’t

The trap: wages and retirement distributions don’t count as investment income, but they DO count toward MAGI. A large Roth conversion or 401(k) distribution can push your MAGI above $250,000 (MFJ) and cause NIIT to apply to investment income that would otherwise have been untaxed at 3.8%.

Worked example: $250,000 in wages + $100,000 in stock gains

A Denver couple, both W-2 employees, married filing jointly. 2026 income:

• Combined wages: $250,000
• Long-term capital gains: $100,000 (sold index fund shares held 4 years)
• MAGI: $350,000

Step 1 — calculate the MAGI excess:

• $350,000 MAGI − $250,000 MFJ threshold = $100,000 excess

Step 2 — identify net investment income:

• $100,000 in long-term capital gains = $100,000 NII

Step 3 — NIIT = 3.8% × the lesser of $100,000 (NII) or $100,000 (excess):

Why 15% and not 20%: the couple’s taxable income after the $31,500 standard deduction (MFJ, 2026) is $318,500. The 20% LTCG rate doesn’t kick in until taxable income exceeds $600,050 (MFJ, 2026). They’re well below that threshold — so the gains are taxed at 15%, not 20%. But the NIIT applies regardless of which LTCG bracket they’re in.

If this same couple had $600,000 in wages and $100,000 in gains, they’d face the 20% LTCG rate plus 3.8% NIIT = 23.8% effective federal rate on capital gains. That’s the top combined federal rate on investment income in 2026.

How NIIT stacks with LTCG rates: the real effective rate table

Most tax discussions cite the 0%, 15%, or 20% LTCG rate. But for households above the NIIT threshold, the actual rate on capital gains is higher:

The 3.8% add-on is flat — it doesn’t phase in or phase out. Once your MAGI crosses $250,000 (MFJ), every additional dollar of net investment income is taxed at 3.8% on top of whatever LTCG bracket applies, until either your NII or your MAGI excess runs out.

The bracket-creep problem: why NIIT catches more people every year

When Congress set the NIIT thresholds in 2010, $250,000 MFJ was roughly the 95th percentile of household income. In 2026, that same $250,000 is closer to the 90th percentile — and the gap widens every year. A dual-income tech couple in Denver, a mid-career attorney in Houston, a small business owner in Phoenix who sells a piece of equipment — these households weren’t the target in 2013. They are now.

Federal income tax brackets are indexed annually under IRC §1(f) — the 22% bracket starts at $96,951 (MFJ) in 2026, up from $83,551 in 2022. The NIIT threshold stays at $250,000. Every year, more households cross it without any real increase in purchasing power.

Strategy 1: tax-loss harvesting — offset gains dollar-for-dollar

The most direct way to reduce NIIT exposure is to reduce net investment income. Capital losses offset capital gains on Schedule D — and every dollar of net gain you eliminate is a dollar that escapes both the LTCG rate and the 3.8% NIIT.

For the Denver couple: if they have $40,000 of unrealized losses in their taxable brokerage (a position in an international fund that’s underperformed), they can harvest those losses in the same year as their $100,000 gain. Net capital gains drop to $60,000. NIIT drops from $3,800 to $2,280 — a $1,520 savings from a portfolio move they may have planned anyway.

Watch the wash sale rule: under IRC §1091, buying a “substantially identical” security within 30 days before or after the sale disallows the loss. Replace with a different fund in the same asset class (e.g., switch from one S&P 500 index fund to another provider’s total market fund) to stay compliant. Note: as of 2026, the wash sale rule does NOT apply to cryptocurrency — a quirk that makes crypto loss harvesting uniquely flexible.

Strategy 2: shift taxable bonds to municipal bonds

Tax-exempt municipal bond interest is excluded from net investment income. If you hold $500,000 in taxable bonds generating $20,000/year of interest, that $20,000 is subject to ordinary income tax AND counts as NII for NIIT purposes. Shifting to a diversified muni bond fund generating $15,000/year in tax-exempt interest removes that income from both calculations.

The math for a household at the NIIT threshold: $20,000 of taxable bond interest at the 24% bracket + 3.8% NIIT = $5,560 in federal tax. $15,000 of muni interest at 0% = $0. Even though the muni yield is lower, the after-tax income is higher for anyone in the 22%+ bracket who’s also above the NIIT threshold.

This strategy works best for taxable brokerage accounts. Tax-advantaged accounts (401(k), IRA) are already tax-deferred or tax-free — holding munis there wastes the tax exemption. Keep taxable bonds in retirement accounts and muni bonds in taxable accounts for maximum efficiency.

Strategy 3: charitable remainder trust — defer the gain, fund a cause

A charitable remainder trust (CRT) lets you contribute appreciated assets before selling them. The trust sells the assets with no immediate capital gains tax, reinvests the full proceeds, and pays you an annual income stream for life (or a term of up to 20 years). The remainder goes to charity.

For NIIT purposes, the key benefit is timing. Instead of recognizing $100,000 of capital gains in one year (triggering $3,800 of NIIT), the CRT spreads income recognition across its payout period. If structured as a 5% charitable remainder unitrust paying over 20 years, each year’s income may be small enough to keep MAGI below the $250,000 threshold entirely.

The trade-off: the assets are irrevocably transferred to the trust. You get an income stream and an upfront charitable deduction, but you cannot access the principal. CRTs make sense for households with concentrated positions they’d like to diversify, a charitable intent, and a long enough time horizon to benefit from the spread.

Strategy 4: timing asset sales across calendar years

NIIT is calculated annually. If you plan to sell $200,000 of appreciated stock, selling $100,000 in December 2026 and $100,000 in January 2027 splits the gain across two tax years. In each year, your MAGI excess is smaller — and the NIIT bill on each $100,000 tranche may be lower than the NIIT on $200,000 in a single year.

For the Denver couple with $250,000 in wages:

In this specific case, splitting doesn’t reduce NIIT because both years land at the same excess. But consider a different scenario: a household with $220,000 in wages and $150,000 in gains. Selling all at once: MAGI $370,000, excess $120,000, NIIT = $4,560. Splitting $75,000 per year: MAGI $295,000 each year, excess $45,000, NIIT = $1,710 × 2 = $3,420. Savings: $1,140.

The strategy works best when wages are below the threshold and investment income is the variable pushing you over. It’s less effective when wages alone exceed $250,000 — because the MAGI excess is locked in regardless of when you sell.

Cross-border note: NIIT and the Canada–US Tax Treaty

For Canadian residents with US-source investment income — US rental property, US stocks held in a non-registered account, or US partnership income — the NIIT creates a widely misunderstood problem.

The misconception: the Canada–US Tax Treaty eliminates double taxation, so NIIT paid to the IRS should generate a full foreign tax credit on your CRA return. The reality: the treaty does NOT specifically address NIIT. The CRA has historically treated NIIT as a tax “in lieu of” income tax, and its eligibility for the Canadian foreign tax credit depends on whether CRA classifies it as an income tax under the treaty. In practice, most cross-border CPAs treat NIIT as creditable, but the IRS and CRA have never issued a joint ruling confirming this treatment.

A GTA-based investor with $100,000 of US-source capital gains faces: 15% US LTCG + 3.8% NIIT = 18.8% to the IRS, plus Ontario provincial tax on the same gains (Ontario inclusion rate and combined federal/provincial marginal rate can push the Canadian side to 26.7% on eligible capital gains). If the FTC fully offsets the US tax, the net cost is the Ontario rate alone. If it doesn’t, the combined bill exceeds what either country would charge independently. Have a cross-border CPA who works both sides model this before selling.

NIIT and Roth conversions: the hidden interaction

Roth conversions are not net investment income — they’re ordinary income from retirement account distributions. But they count toward MAGI. A retiree with $40,000 in dividends and $50,000 in wages who converts $200,000 from a Traditional IRA to Roth has a MAGI of $290,000.

The NIIT calculation: 3.8% × lesser of $40,000 (NII) or $40,000 ($290K − $250K excess) = $1,520. Without the Roth conversion, MAGI would be $90,000 — well below the $250,000 threshold, and NIIT would be $0.

This doesn’t mean you should avoid Roth conversions. It means you should model the NIIT cost as part of the conversion decision. Converting $150,000 instead of $200,000 might keep MAGI at $240,000 — below the threshold — and save the full $1,520. The IRMAA coordination logic applies here too: target your conversion amount to stay below whichever cliff — NIIT at $250K or IRMAA at $206K — produces the larger savings.

How to report NIIT: Form 8960

NIIT is calculated and reported on Form 8960, filed with your Form 1040. The form walks through:

1. Total investment income (interest, dividends, capital gains, rental, royalties, passive business income)
2. Investment expenses properly allocable to investment income
3. Net investment income (line 1 minus line 2)
4. MAGI threshold comparison
5. 3.8% of the lesser amount

The NIIT is added to your regular income tax and reported on Schedule 2, line 18 of Form 1040. It is not subject to estimated tax penalty safe harbors separately — but if you don’t account for it in your quarterly estimates, you’ll face an underpayment penalty in April.

The numbers for 2026

The NIIT isn’t new, and it isn’t going away. It was designed as a permanent funding mechanism for Medicare, with no sunset provision. The frozen thresholds mean it captures a wider slice of households every year — an estimated 6–7 million returns now owe NIIT, up from roughly 3.5 million when it launched.

For the Denver couple: the $3,800 NIIT on their $100,000 gain is 25% of what they budgeted for their entire federal capital gains bill. It shows up on Form 8960, gets added to their 1040, and hits as a surprise for households that planned around the 15% LTCG rate without modeling the surtax.

Before realizing a large capital gain, run the full NIIT calculation: MAGI minus threshold, compared to net investment income, times 3.8%. Then decide whether harvesting losses, shifting to munis, splitting the sale across years, or converting to a charitable remainder trust brings the number down. The 3.8% is small enough to ignore on a $10,000 gain. On $100,000 or more, it’s $3,800+ that belongs in the model.