What's the Difference Between the Net Investment Income Tax and the Capital Gains Tax?

High-income investors can face both the capital gains tax and the Net Investment Income Tax (NIIT) on the same investment profits. The capital gains tax applies to profits from selling investments — 0%, 15%, or 20% for long-term gains depending on your total income. The Net Investment Income Tax is an additional 3.8% tax that applies to investment income, including capital gains, dividends, and rental income, if your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. When both taxes apply to a long-term capital gain for a higher-income investor, the combined rate can reach 23.8%. The NIIT was created as part of the Affordable Care Act to fund Medicare and only applies to passive investment income, not wages or income from an active business.