October 2, 2026 · 7 min read
What Is Net Investment Income Tax (NIIT)? How It Works and Examples
What the extra 3.8% tax on investment income covers, who pays it, how it is worked out and what it means when you sell a private-company stake.
- Tax
- Capital gains
- Exits
What is NIIT? The net investment income tax (NIIT) is a 3.8% US federal tax on investment income. That includes capital gains, dividends, interest, rents and passive income. It applies to individuals whose modified adjusted gross income, a measure of total income, exceeds $200,000, or $250,000 on a joint return. It is charged on top of ordinary income tax or capital-gains tax.
If you invest in private companies, it matters when you exit. A pre-IPO position sold in one year can push income far over the threshold. The 3.8% then applies to most of the gain. Two kinds of income stay outside it: pay that is taxed as wages, and gain excluded under Section 1202, the tax break for qualified small business stock.
3.8%
Rate on the lesser of net investment income or the income above the threshold
$200,000
Threshold for single filers, $250,000 joint and $125,000 married filing separately, with no inflation adjustment
$16,000
Undistributed income at which a trust or estate starts paying it in 2026
General Information, Not Tax Advice
This page describes US federal law as of October 2026, with illustrative numbers. Whether a given item is net investment income can turn on your own facts: how you hold it, and whether you are active in the business. Have a qualified tax adviser check your return.
What Is the NIIT Tax, and What Is It Based On?
The tax was enacted in 2010 and has applied since January 1, 2013. Section 1411 of the tax code bases it on net investment income: three kinds of income, minus the deductions allocated to them.
- Portfolio incomeInterest, dividends, annuities, royalties and rents, unless earned in the ordinary course of an active business.
- Passive and trading incomeIncome from a business in which you do not materially participate, meaning you do not work in it on a regular, continuous and substantial basis. Also income from trading financial instruments or commodities.
- Net gainGain on selling stocks, bonds, fund interests, investment property and interests in partnerships or S corporations. It counts only to the extent it is included in taxable income.
What is left out matters just as much. Wages, self-employment income, unemployment benefits, Social Security, alimony, tax-exempt interest and payouts from qualified retirement plans are not net investment income. Neither is gain that the tax code excludes from income altogether. Two examples are the excluded part of a home sale and the excluded part of a qualified small business stock sale.
What Is the NIIT Threshold?
The threshold is measured on modified adjusted gross income (MAGI). For most US residents, MAGI is simply adjusted gross income: total income minus a few adjustments, before the standard or itemized deduction. It also adds back any foreign earned income excluded under Section 911. The thresholds are written into the law and are not adjusted for inflation. So the NIIT threshold for 2026 is the same as in 2013, and it reaches more households every year.
Individual thresholds are fixed in the law. The trust figure is the start of the top trust bracket, which is indexed for inflation. It was $15,650 in 2025
As of October 2026 · 26 USC 1411(b) · IRS Topic 559 · Rev. Proc. 2025-32 for 2026
Nonresident aliens, people who are neither US citizens nor US tax residents, are not subject to the tax. A US citizen living abroad is. This matters if you live outside the US and hold US private-company positions. Your residence status decides it. Where the company is based does not. See also W-8BEN for how non-US status is documented.
What Is the NIIT, and How Is It Calculated?
The NIIT tax rate is a flat 3.8%. It applies to the smaller of two numbers: your net investment income, or the amount by which your MAGI exceeds the threshold. The NIIT does not tax wages, but wages still count in MAGI. So a high salary uses up the threshold and leaves more of your investment income exposed.
- Add up net investment incomeGains, dividends, interest, rents and passive income, less allocable deductions.
- Find MAGIAdjusted gross income, plus any excluded foreign earned income.
- Subtract the threshold$200,000, $250,000 or $125,000 by filing status. If the result is zero or less, there is no tax.
- Take the smaller numberNet investment income or the excess from step 3.
- Multiply by 3.8%The result goes on Form 8960 and onto your Form 1040.
It is called the NIIT surtax because it sits on top of the regular tax. The top long-term capital-gains rate is 20%. In 2026 it applies above $545,500 of taxable income for a single filer and $613,700 on a joint return. So the top federal rate on a large gain is 23.8%. No employer withholds the NIIT. You pay it through estimated tax payments or extra withholding.
How the NIIT Lands on a Pre-IPO Exit
If you are an investor, almost every way money comes back from a private company is net investment income. That includes a gain passed through from an SPV, a vehicle that pools investors’ money for one deal, when it sells its shares. It includes the proceeds of selling your interest on the secondary market, where existing shares change hands before a listing. It also includes dividends paid after a listing. One large exit in one tax year is the typical way a private investor crosses the threshold by a wide margin.
If you are an employee, the split is different. When you exercise a non-qualified option, the spread, the gap between the share value and the price you pay, is wages. So is the value of RSUs, shares your employer promised you, when they vest. Both are subject to payroll tax and stay outside the NIIT. Only the later gain on selling the shares is net investment income. So the same stock can produce income on both sides of the line.
Qualified small business stock (QSBS) is the main exception for founders and early holders. Gain excluded under Section 1202 is not in taxable income. So it is in neither MAGI nor net investment income. Only the part above the cap, or the taxed part of a partial exclusion, carries the 3.8%. How the exclusion is sized is covered in what is QSBS. Carried interest, a fund manager’s share of the profits, is a separate case. See the carried interest loophole.
Worked Example: What Is the NIIT Rate on Four Different Exits?
Four taxpayers in 2026 each have a salary and one gain from a private-company position. In column D, the shares are QSBS acquired after July 4, 2025, and held five years. They have a $500,000 basis and a $20 million gain, so $15 million is excluded.
Illustrative figures for hypothetical taxpayers. All gains are long-term, with no other income or allocable deductions. In C, the $400,000 gain is excluded under Section 1202. Regular income tax and state tax are not shown
Computed on 26 USC 1411(a)–(b) and 1202(a)–(b) · thresholds as of October 2026
Column A is the common case. MAGI above the threshold, $350,000, is smaller than the $400,000 gain. So $50,000 of the gain escapes the tax. Column B sits under the joint threshold. Column C pays nothing because the gain never enters income. In D, the $15 million excluded carries no surtax, but the $5 million above the cap does.
Common Mistakes with the Net Investment Income Tax
- Assuming the threshold rises with inflationIt has not moved since 2013. Planning on an old “adjusted” figure understates the tax.
- Forgetting wages count in MAGIThe NIIT does not tax salary, but salary fills up the threshold. That leaves more of the gain exposed.
- Not paying it during the yearNo employer withholds it. A large exit without an estimated payment can bring an underpayment penalty.
- Treating every gain as investment incomeGain on an interest in a business you actively run can be partly outside it. The rules turn on material participation.
- Missing the trust thresholdA trust that keeps its gains reaches the surtax at $16,000 in 2026, far below an individual.
The NIIT is 3.8% on investment income above a threshold that never moves. On a pre-IPO exit, wages and QSBS-excluded gain stay outside it.
The Terms This Page Uses
- Net investment income tax (NIIT)
- A 3.8% federal tax under Section 1411 on investment income of individuals, estates and trusts above set thresholds.
- Net investment income
- Interest, dividends, rents, royalties, passive and trading income and net gain, less allocable deductions.
- Modified adjusted gross income (MAGI)
- For the NIIT, adjusted gross income plus excluded foreign earned income. Compared with the threshold.
- Threshold amount
- $250,000 joint, $200,000 single or head of household, $125,000 married filing separately. Not indexed.
- Surtax
- A tax charged on top of the regular income tax. The NIIT is one.
- Material participation
- Regular, continuous and substantial work in a business. It decides whether the business’s income is passive.
- QSBS
- Qualified small business stock. Gain excluded under Section 1202 stays outside both MAGI and the NIIT base.
Questions About the NIIT
A flat 3.8%. It does not rise with income. What changes is the base it applies to: the lesser of your net investment income and your MAGI above the threshold.
The same as every year since 2013. It is $200,000 for single and head-of-household filers, $250,000 for joint filers and $125,000 for married filing separately. For trusts and estates, it is $16,000 of undistributed income in 2026.
It is another name for the same 3.8% tax. It is called a surtax because it is added on top of the regular income tax. With the top 20% long-term capital-gains rate, the top federal rate on a large gain is 23.8%.
Not to the part taxed as wages. That covers the spread on a non-qualified option exercise and RSUs at vesting. The NIIT can apply to the gain when you later sell the shares.
The excluded part is not, because it is never included in income. The part above the per-company cap, or the taxed part of a partial exclusion, is net investment income like any other gain.
Nonresident aliens do not. US citizens and resident aliens do, wherever they live. Trusts and estates have their own rules.
Where Every Rule on This Page Comes From
Every rate and threshold was checked against the US Code, the Treasury regulations and the IRS on October 2, 2026, and applies to tax year 2026. The worked example is illustrative arithmetic. State taxes are not covered.
- 01US Code (Cornell LII)Current law26 USC 1411 — 3.8% rate, lesser-of rule, thresholds, definition of net investment income, MAGI
- 02Code of Federal Regulations (Cornell LII)Current26 CFR 1.1411-4 — net gain only to the extent taken into account in computing taxable income
- 03Internal Revenue ServiceCurrentQuestions and answers on the NIIT — thresholds not indexed, excluded income, nonresident aliens
- 04Internal Revenue Service2025Topic 559 — rate, thresholds, exclusions, $15,650 trust threshold for 2025, estimated tax
- 05Internal Revenue Service2025Instructions for Form 8960 — thresholds and computation
- 06Internal Revenue Service10.2025Rev. Proc. 2025-32 — 2026 trust brackets ($16,000) and capital-gains breakpoints
- 07US Code (Cornell LII)Current law26 USC 1202 — exclusion of QSBS gain from gross income and the per-issuer cap
This page explains how a market works. It is not investment advice, not a recommendation of any security, strategy or company, and not an offer to sell or a solicitation to buy anything. Private companies may never list or be acquired, positions in them can be illiquid for years, and the entire amount invested can be lost. Figures are accurate as of the dates shown and change. Requirements for investor status, and the tax treatment of a private holding, differ by jurisdiction — the jurisdiction is named wherever this page discusses either. Prepared by the AXEVIL Capital research team. Tax rules described here are United States federal rules unless another jurisdiction is named; they change every year and depend on your own facts. Nothing here is tax advice — take your documents to a qualified adviser.
What closed on the private market in the past two weeks
The rounds that priced, the tender offers that opened and the listings that filed — with the structure of each deal and the date on every figure. Written by the team that reads the paperwork.
Where to go from here
TaxesWhat Is Qualified Small Business Stock (QSBS)? Definition and ExamplesWhat is QSBS? Qualified small business stock can take the federal tax off part or all of a startup gain. Which shares qualify and how much gain is excluded.
TaxesWhat Is the Carried Interest Loophole? How It Works and ExamplesThe carried interest loophole lets fund managers pay long-term capital-gains rates on their profit share. The three-year rule, the 2026 rates and an example.
TaxesHow Are RSUs Taxed? Definition, How It Works and ExamplesRSUs are taxed as pay when the shares are delivered, then as a capital gain or loss when you sell. Withholding, private-company timing and a worked example.