What is the net investment income tax (NIIT)? Definition, how it works and examples
The 3.8% surtax that sits on top of capital-gains rates for higher earners — what income it reaches, the thresholds, and how it lands on a pre-IPO exit.
The short answer
What is NIIT? The net investment income tax is a 3.8% US federal tax on investment income — capital gains, dividends, interest, rents and passive income — paid by individuals whose modified adjusted gross income exceeds $200,000, or $250,000 on a joint return. It is charged on top of the ordinary income or capital-gains tax. For a private-company investor it matters on the exit. A pre-IPO position sold in one year can push income far over the threshold, and the 3.8% then applies to most of the gain.
What is NIIT tax, and what is it based on?
The tax was enacted in 2010 and has applied since 1 January 2013. Section 1411 bases it on net investment income: three kinds of income, less the deductions properly allocated to them. Portfolio income Interest, dividends, annuities, royalties and rents, unless earned in the ordinary course of an active business. Passive and trading income Income from a business in which you do not materially participate, and from trading financial instruments or commodities.
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; it adds back foreign earned income excluded under Section 911. The figures are written into the statute and are not adjusted for inflation, so the NIIT threshold for 2026 is the same as in 2013 — and reaches more households every year. Nonresident aliens are not subject to the tax. A US citizen living abroad is. That distinction matters for investors outside the US who hold US private-company positions — residence status, not where the company is, decides it.
What is NIIT and how is it calculated?
The NIIT tax rate is a flat 3.8%. It is applied to the lesser of two numbers: your net investment income, or the amount by which your MAGI exceeds the threshold. Wages are not taxed by it but still count in MAGI — so a high salary uses up the threshold and leaves more of the investment income exposed. Add up net investment income Gains, dividends, interest, rents and passive income, less allocable deductions. Find MAGI Adjusted gross income, plus any excluded foreign earned income. Subtract the threshold $200,000, $250,000 or $125,000 by filing status.
How the NIIT lands on a pre-IPO exit
For an investor, almost every way money comes back from a private company is net investment income: a gain passed through from an SPV when it sells its shares, the proceeds of selling your interest on the secondary market, or 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. For an employee the split is different. The spread on exercising a non-qualified option and the value of RSUs at vesting are wages — subject to payroll tax, not to the NIIT.
Worked example: four exits, four NIIT bills
Four taxpayers in 2026 each have salary and one gain from a private-company position. In column D the shares are QSBS acquired after 4 July 2025 and held five years, with a $500,000 basis and a $20 million gain, so $15 million is excluded. Column A is the common case: $50,000 of the gain escapes only because MAGI, not net investment income, is the smaller number. 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 inflation It has not moved since 2013. Planning on an old “adjusted” figure understates the tax. Forgetting wages count in MAGI Salary is not taxed by the NIIT but fills the threshold, leaving more of the gain exposed. Not paying it during the year There is no withholding on it. A large exit without an estimated payment can bring an underpayment penalty. Treating every gain as investment income Gain on an interest in a business you actively run can be partly outside it. The rules turn on material participation.
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.
Questions about the NIIT
What is the NIIT rate? 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. What is the NIIT threshold for 2026? The same as every year since 2013: $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. Does the NIIT apply to stock option or RSU income? Not to the part taxed as wages — the spread on a non-qualified option exercise or RSUs at vesting.
What is the NIIT rate?
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.
What is the NIIT threshold for 2026?
The same as every year since 2013: $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.
Does the NIIT apply to stock option or RSU income?
Not to the part taxed as wages — the spread on a non-qualified option exercise or RSUs at vesting. It can apply to the gain when you later sell the shares.
Is QSBS gain subject to the NIIT?
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.
Do non-US investors pay the NIIT?
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 2 October 2026 and applies to tax year 2026. The worked example is illustrative arithmetic, not market data. State taxes are not covered.