The Differences Between Short-Term and Long-Term Capital Gains
Capital gains occur when you sell an asset for more than its purchase price. The distinction between short-term and long-term capital gains is important for tax purposes, as each is treated differently under U.S. tax law.
Short-Term Capital Gains
Short-Term Capital Gains are gains from the sale of assets held for one year (365 days) or less are considered short-term.
These gains are taxed as ordinary income, meaning the tax rate depends on your marginal tax bracket which is the highest tax rate applicable to you. Currently, ordinary income rates range from 10% to 37%. For the latest rates, see Latest Ordinary Income Rates
Long-Term Capital Gains
Long-Term Capital Gains are gains from the sale of assets held for more than one year (366 days and longer) qualify as long-term.
These gains benefit from preferential tax rates, which are typically lower than ordinary income tax rates. Currently, the long-term capital gains tax rates are 0%, 15%, or 20%, depending on your taxable income. For the latest rates, see Latest Capital Gains Rates
Key Differences
| Feature | Short-Term Capital Gains | Long-Term Capital Gains |
|---|---|---|
| Holding Period | 1 year or less | More than 1 year |
| Tax Rates | Ordinary income tax rates (10%-37%) | Preferential rates (0%, 15%, 20%) |
| Tax Implications | Potentially higher tax liability | Lower tax liability for most taxpayers |
Why It Matters
Understanding the distinction between short-term and long-term capital gains can help you strategically plan your investment sales. Holding assets for more than a year often results in significant tax savings, which is a critical consideration for optimizing after-tax returns. Proper timing and planning can ensure you maximize the benefits of the long-term capital gains tax rates.