The Act establishes a maximum tax rate of 15% on net long-term capital gains of individuals, trusts, and estates.

For capital gains, the 15% maximum tax rate replaces the prior-law general 20% maximum rate (and the 18% rate that would have applied to gains from property that was held for more than five years and whose holding period began after 2000). Thus, an individual's net capital gain will be taxed at a maximum rate of 15% to the extent it is a net gain on assets held more than 12 months.

A lower maximum rate of 5% applies to net long-term capital gain that would otherwise be taxed at a regular income tax rate less than 25% (i.e., gain otherwise taxed in the 10% or 15% income tax brackets). In 2003, under the Act, the 5% rate applies to taxable income of up to $28,400 ($56,800 on a joint return).

In a tax year beginning in 2008, the maximum rate for net long-term capital gain otherwise eligible for the 5% rate will be zero. The Act repeals the 10% maximum rate that applies to gains that would otherwise be taxed at a rate below 25% (and the 8% maximum rate on assets held more than five years).

The new maximum rates are effective for gains properly taken into account after May 5, 2003. The prior-law maximum rates apply through May 5, 2003. Generally, the date of an asset's sale or exchange determines which maximum rate applies. Gain from installment sales is recognized on the date a payment is received. In the case of a pass-through entity, the date that gain is accounted for is determined at the entity level.

As under prior law, gains on collectibles and "qualified small business" stock and certain gains on real property are not eligible for the 15% or 5% rates, but are subject to a maximum tax rate of 28% (25% on "unrecaptured section 1250 gain" on real property).

The 15% (and 5%) maximum tax rates also apply in computing alternative minimum tax (AMT). In computing AMT, gain on "qualified small business" stock generally is taxed at approximately 15%.

The changes to the maximum tax rate on net long-term capital gains terminate for tax years beginning after 2008. Thus, in 2009 the law reverts to a 20%, 18%, 10%, or 8% maximum rate on net long-term capital gains.