Tax Planning

Capital Gains Tax: Short-Term vs. Long-Term

5 min read

What Is Capital Gains Tax?

When you sell an asset for more than you paid, the profit is a capital gain — and the IRS wants its share. The rate you pay depends on one critical question: how long did you hold the asset?

Short-Term vs. Long-Term

Short-term capital gains apply to assets held for one year or less. These gains are taxed as ordinary income — the same rates that apply to your W-2 wages. For 2025, that means rates ranging from 10% to 37%, depending on your total taxable income.

Long-term capital gains apply to assets held for more than one year. These enjoy preferential rates:

0% — if your taxable income falls below the threshold ($48,350 for single filers, $96,700 for married filing jointly in 2025)
15% — for most taxpayers in the middle brackets
20% — for the highest earners (above $533,400 single, $600,050 married)

The one-year holding period is measured from the day after you acquire an asset to the day you sell it. Selling on day 365? That's short-term. Wait until day 366, and you're long-term.

The 0% Bracket: A Massive Opportunity

Many investors overlook the 0% long-term capital gains rate. If you find yourself in a low-income year — between jobs, early retirement, or a sabbatical — you may be able to realize gains tax-free.

This is the engine behind strategies like tax-gain harvesting: deliberately selling appreciated assets to reset your cost basis while paying no federal tax. Just watch for state taxes, which typically don't offer a 0% bracket.

Net Investment Income Tax (NIIT)

Above certain income thresholds ($200,000 single, $250,000 married filing jointly), an additional 3.8% surtax applies to investment income, including capital gains. This effectively makes the top long-term rate 23.8% and the top short-term rate 40.8%.

The NIIT applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold.

Strategies to Minimize the Hit

Hold for 12+ months whenever practical. The tax savings from long-term treatment are substantial — often 10–20 percentage points.
Harvest losses. Sell losing positions to offset gains, then reinvest in something similar (but not substantially identical, to avoid the wash sale rule).
Consider your bracket timing. If you expect your income to drop in the near future, deferring a sale can land you in a lower bracket.
Donate appreciated shares instead of cash to charity. You avoid capital gains entirely, and you still get the full fair-market-value deduction (if you itemize).
Step-up at death. Heirs receive assets at their fair market value on the date of death, wiping out the unrealized gain.

State Capital Gains Taxes

Don't forget state taxes. Most states tax capital gains as ordinary income, with rates ranging from 0% (states like Florida, Texas, Nevada) to over 13% (California). Factor this into your selling decisions — living in a high-tax state can nearly double your tax bill on the same gain.

Key Takeaway

The difference between short-term and long-term capital gains treatment is one of the largest levers available to individual investors. A few extra weeks of patience can save thousands in taxes. Plan your sales around the holding period, and when your income is low, grab the 0% bracket while you can.