Capital gains: short-term vs. long-term

When you sell an investment for more than you paid, the difference is a capital gain. The IRS taxes those gains, but the rate depends on how long you held the investment before selling.

Short-term capital gains

Held one year or less. Taxed at your ordinary income tax rate — the same rate as your salary. For high earners, that can mean 32% to 37% federal, plus state tax. Plus a possible 3.8% Net Investment Income Tax for higher incomes.

Long-term capital gains

Held more than one year. Taxed at preferential rates — 0%, 15%, or 20% depending on your taxable income. Most middle-income filers pay 15%. Some pay 0% on a portion of their gains.

Why this matters

If you bought a stock for $10,000 and sold it for $20,000, you made $10,000 in gains. Held 11 months, in a 35% bracket → roughly $3,500 in tax. Held 13 months, same person, 15% long-term rate → $1,500 in tax. The only difference was waiting two more months.

Wash sale rule

If you sell at a loss to claim a tax benefit, you cannot buy the same security back within 30 days, or the IRS disallows the loss. This catches a lot of beginners. Read about it before any tax-loss harvesting.

Where this rule does not apply

Inside a 401(k), Roth IRA, or Traditional IRA, capital gains are not taxed when they happen. You can rebalance and trade freely without any short- or long-term tax consequence inside those accounts.