You get a raise.
You feel proud.
You maybe upgrade your coffee habits from “office sludge” to “dangerously overpriced latte.”
Life is good.
Then tax season shows up like a party crasher who drank all your beer and says, “By the way, your investment taxes are higher this year.”
Wait—what?
You didn’t sell more stocks.
You didn’t suddenly turn into Warren Buffett.
Your portfolio didn’t go rogue in the night.
So why does it feel like earning more money somehow made investing worse?
This is the moment people start muttering things like:
“Taxes are broken.”
“The system is rigged.”
“What’s the point of working harder?”
The system isn’t broken.
It’s just… sneakier than people expect. This is the Difference between Capital Gains vs Ordinary Income.
Your raise didn’t directly increase your capital gains tax.
Income stacking did.
Once you understand how capital gains and ordinary income interact, the frustration fades—and something better replaces it: control.
Let’s unpack this without tax jargon, legalese, or soul damage.
Why This Confuses So Many Investors
Most people carry around a very simple mental model of taxes:
“If I move into a higher tax bracket, all my income gets taxed at that higher rate.”
This belief refuses to die, and it causes an incredible amount of confusion.
It’s wrong.
Very wrong.
Wrong in a way that quietly costs people thousands of dollars.
What actually happens is more nuanced—and that nuance is where the tax bill sneaks up on you.
The U.S. tax system uses:
- Marginal tax rates (how your last dollar is taxed)
- Effective tax rates (your average rate across all income)
- Separate tax brackets for capital gains
And here’s the key twist:
Capital gains don’t live in isolation.
They sit on top of your ordinary income.
Like a layer cake.
Or a Jenga tower.
Or a bad game of financial Tetris.
That stacking effect is why raises and promotions can mess with your investment taxes—even if your investing behavior stays exactly the same.
Ordinary Income vs Capital Gains (Plain English Edition)
Before we go further, we need to be crystal clear about the two income buckets the IRS cares about.
Ordinary Income
This is your “work and effort” money:
- Salary and wages
- Bonuses
- Freelance or business income
- Interest income
- Short-term capital gains (assets held one year or less)
Ordinary income is taxed progressively. Different slices get taxed at different rates as your income rises.
Capital Gains
Capital gains come from selling assets like:
- Stocks
- ETFs
- Mutual funds
- Real estate
- Crypto (yes, it counts)
They split into two types:
- Short-term gains (≤ 1 year): taxed exactly like ordinary income
- Long-term gains (> 1 year): taxed at special rates—0%, 15%, or 20%
On paper, this looks simple.
In real life, income stacking turns it into a psychological ambush.
Income Stacking: The Rule That Changes Everything
Here’s the rule most people never learn until it hurts:
Your ordinary income fills the tax brackets first.
Your capital gains get stacked on top.
That’s it.
That’s the whole trick.
Imagine your income like water filling a glass:
- Your salary and wages go in first
- Bonuses and interest pile on
- Capital gains are poured in last
The higher the water level before gains arrive, the more likely those gains spill into higher tax rates.
This is why raises matter.
Not because they directly tax your investments—but because they crowd out the lower brackets your investments were enjoying before.
A Real Example: How a Raise Raises Investment Taxes
Let’s make this concrete.
Meet Alex. Normal human. Decent job. Not a hedge fund villain.
Before the Raise
- Salary: $60,000
- Long-term capital gains: $10,000
Alex’s taxable income sits low enough that part of his capital gains land in the 0% capital gains bracket.
Result:
- Some gains taxed at 0%
- Some taxed at 15%
- Total tax on gains: pretty chill
After the Raise
- Salary: $85,000
- Long-term capital gains: $10,000
Same investments.
Same gains.
Same decisions.
But now Alex’s higher salary fills up the lower brackets before the gains arrive.
Result:
- All capital gains taxed at 15%
- Zero dollars qualify for the 0% rate
Nothing changed in the market.
Nothing changed in the portfolio.
Only the stacking changed.
That’s the “Wait… what?” moment.
Marginal vs Effective Tax Rates (Why Headlines Mislead You)
You’ll hear people say things like:
“I’m in the 22% tax bracket now.”
That statement is both true and misleading.
Marginal Tax Rate
Your marginal rate applies only to the last dollar you earned.
If your marginal rate is 22%, that doesn’t mean everything is taxed at 22%.
Effective Tax Rate
Your effective rate is your average across all income.
This is the number that actually matters for real-life planning.
Now here’s the part most people miss:
Capital gains don’t care about your marginal rate.
They care about how much ordinary income has already filled the brackets.
This is why someone in a 22% marginal bracket can still pay:
- 0% on capital gains
- or 15%
- or 20%
Same marginal rate.
Very different outcomes.
The Hidden Side Effects of Raises (That No One Warns You About)
Raises feel clean and positive on a paycheck.
Taxes show the consequences months later.
A higher income can quietly trigger:
- Loss of the 0% capital gains bracket
- The 3.8% Net Investment Income Tax
- Phase-outs of deductions and credits
- Higher Medicare premiums later in life
- Bigger tax bills on perfectly normal investment activity
None of this is obvious when you accept the raise.
It’s revealed later, like a jump scare in a bad horror movie.
How Smart Investors Plan Around Income Stacking
This is where strategy enters the chat.
Smart investors don’t obsess over avoiding taxes entirely.
They obsess over timing.
Sell in Lower-Income Years
Career gaps. Sabbaticals.
Starting a business.
Early retirement.
Slow years.
These are golden windows to realize gains at lower—or even zero—rates.
Delay Gains When Income Spikes
Promotion year?
Huge bonus?
Business windfall?
Great year to earn.
Often a terrible year to sell appreciated assets.
Use Tax-Loss Harvesting
Losses reduce taxable income.
That can reopen lower capital gains brackets that income stacking closed.
Pair Gains With Roth Conversions
In low-income years, you can:
- Sell long-term gains
- Convert traditional IRA funds
- Fill lower brackets efficiently
This is advanced, powerful, and wildly underused.
Watch the 0% Capital Gains Bracket Like a Hawk
It’s not just for low earners.
Retirees, early FIRE folks, career switchers, and entrepreneurs use it constantly—because they understand stacking.
A Common Mistake That Costs People Thousands
People assume:
“If I earned more, I must be doing better.”
But earning more without planning can:
- Increase investment taxes
- Raise healthcare costs later
- Reduce credits
- Shrink real net returns
The goal isn’t to earn less.
The goal is to control when income shows up on your tax return.
That’s how wealthy households stay wealthy—not by avoiding taxes, but by shaping them.
Internal Link
Want to dig deeper into timing?
👉 See our guide on short-term vs long-term capital gains
FAQ: Capital Gains vs Ordinary Income
Does a raise automatically increase my capital gains tax rate?
No—but it can push your gains into higher brackets through income stacking.
Why am I paying capital gains tax if I’m not in a “high” tax bracket?
Because capital gains brackets depend on total taxable income, not your marginal rate.
Can I qualify for 0% capital gains with a high salary?
Usually no—but low-income years, early retirement, or income gaps can change everything.
Are short-term capital gains always bad?
They’re taxed as ordinary income, so timing matters more than the investment itself.
Final Thoughts: Raises Are Good — Planning Is Better
Getting paid more is a win.
Keeping more of what you earn is the real victory.
Capital gains tax isn’t about punishment.
It’s about timing, stacking, and understanding how income layers together.
Once you see the system clearly, tax season stops feeling like a surprise attack and starts feeling… manageable. Even predictable.
If you want to see how your income and investments interact before you sell, you can estimate different scenarios at CapitalTaxGain.com—and plan ahead instead of learning the hard way.
Earn well.
Plan better.
And never let a raise sneak up on your portfolio again.
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