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 a substantially identical security within the 30 days before or after the sale, 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.

What this lesson is NOT

This is not tax advice. It explains how holding period changes the tax on a gain, not what you will owe, which depends on your full income, your state, and rules that change. It does not cover every case, such as collectibles, real estate, or the net investment income tax. A CPA earns their fee on a complicated year.