The difference between short-term and long-term capital gains comes down to how long you owned the asset before selling. Hold it for one year or less and any profit is a short-term gain, taxed at the same rates as your paycheck, up to 37%. Hold it for more than one year and the profit becomes a long-term gain, taxed at a preferential rate of 0%, 15%, or 20% depending on your income. On the same $20,000 profit, that gap can easily mean well over a thousand dollars in federal tax.
How the One-Year Line Is Measured
Your holding period starts the day after you acquire an asset and includes the day you sell it.1IRS.gov. Reporting Capital Gains Buy stock on March 1 and sell it on March 1 the following year, and you have held it for exactly one year, which is still short-term. Sell on March 2 and you cross into long-term territory. For publicly traded stocks and bonds, the trade date controls, not the later settlement date.
The gain itself is the sale price minus your adjusted cost basis. Basis is usually what you paid plus related expenses like broker commissions and transfer fees; for real estate, it also includes capital improvements such as a new roof or an addition.2Internal Revenue Service. Topic No. 703, Basis of Assets
Short-Term Capital Gains Tax Rates
Short-term gains get no special treatment. The IRS stacks them on top of your wages and other ordinary income and taxes them at the graduated federal brackets.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, the seven brackets for single filers are:4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 10% on taxable income up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% over $640,600
Married couples filing jointly have wider brackets, with the 37% rate starting at $768,700.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A high earner who flips an asset inside a year can lose more than a third of the profit to federal tax alone.
Long-Term Capital Gains Tax Rates
Holding more than a year unlocks the preferential brackets. For 2026:5Internal Revenue Service. Revenue Procedure 2025-32
- 0% on taxable income up to $49,450 single, $98,900 joint
- 15% from $49,451 to $545,500 single, $98,901 to $613,700 joint
- 20% above $545,500 single, above $613,700 joint
The 0% bracket is real. If your total taxable income after deductions stays below the threshold, you owe nothing federal on your long-term gains. Most middle-income sellers land in the 15% bracket, which is still substantially cheaper than the ordinary rates that would apply to the same profit if it were short-term. These thresholds adjust for inflation each year.
The 3.8% Net Investment Income Tax
High earners owe an additional 3.8% surtax on investment income, capital gains included. It kicks in when modified adjusted gross income tops $200,000 for single filers or $250,000 for married couples filing jointly.6Internal Revenue Service. Net Investment Income Tax Those thresholds are not indexed to inflation, so more taxpayers get pulled in every year. Someone in the 20% long-term bracket effectively pays 23.8% federal on the gain.
What the Difference Looks Like in Dollars
Say you are a single filer with $80,000 in taxable wages and you sell stock for a $20,000 profit. Held for 11 months, the gain is short-term and lands mostly in the 22% bracket, costing about $4,400 in federal tax. Wait one more month and sell it as a long-term gain, and the whole $20,000 is taxed at 15% for $3,000. Same stock, same profit, $1,400 less tax because of the sale date.
h2>Assets That Don’t Get the Standard Long-Term Rates
Two categories of long-term gains carry higher maximum rates:3Internal Revenue Service. Topic No. 409, Capital Gains and Losses
- Collectibles such as coins, art, antiques, precious metals, and stamps are taxed at a maximum long-term rate of 28%.
- On a sale of rental real estate, the portion of gain attributable to prior depreciation is taxed at a maximum rate of 25%.
The higher rates apply only to that specific slice of the gain. Any remaining long-term gain still gets the regular 0/15/20% treatment.
Inherited and Gifted Assets Follow Different Rules
How you acquired an asset changes both the holding period and the basis, which can matter more than the sale date itself.
Inherited property gets a stepped-up basis to fair market value on the date of the previous owner’s death.7Internal Revenue Service. Gifts and Inheritances If a parent bought stock for $10,000 that was worth $80,000 at death, your basis is $80,000. Inherited assets also count as long-term automatically, even if you sell the day you receive them.8Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
Gifts work the opposite way. You take the donor’s original basis and their holding period. Stock a relative bought five years ago for $2,000 and gave you last month has a $2,000 basis and a holding period stretching back five years, so any sale is long-term.
Selling Your Home Is a Separate Rule
The most valuable capital gains break most people ever use applies to a primary residence. If you owned and lived in the home for at least two of the five years before the sale, you can exclude up to $250,000 of gain from federal tax, or $500,000 if you are married filing jointly.9Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The exclusion is available once every two years. Gain above the exclusion is taxable, and the holding period determines whether that excess is short-term or long-term.
One related point worth knowing: investments held inside a traditional IRA, Roth IRA, 401(k), or similar account are not subject to capital gains tax when you buy and sell inside the account.10Internal Revenue Service. Individual Retirement Accounts Can Be Important Tools in Retirement Planning The short-term versus long-term line only matters for assets you hold in a taxable brokerage account.
Offsetting Gains With Losses
You do not pay tax on every winning trade in isolation. Short-term gains and losses are netted against each other first, and long-term gains and losses the same way.11Office of the Law Revision Counsel. 26 USC 1222 – Other Terms Relating to Capital Gains and Losses If both come out positive, each is taxed at its own rate. If one category is a loss, it reduces a net gain in the other. A short-term loss used against a long-term gain still helps, but a short-term loss offsetting a short-term gain is generally more valuable, because it cancels income that would have been taxed at ordinary rates.
When total losses exceed total gains, you can deduct up to $3,000 of the excess against other income each year, or $1,500 if married filing separately.3Internal Revenue Service. Topic No. 409, Capital Gains and Losses Anything left carries forward to future years indefinitely.
State Taxes Sit on Top
Federal rates are only part of what you owe. Most states tax capital gains as ordinary income at rates ranging from about 2% to over 13%, and very few offer a preferential rate for long-term gains. A handful of states have no income tax and leave residents with only the federal bill. In a high-tax state, the combined federal and state rate on a short-term gain can exceed 45%, which is why the timing of a sale often matters more than the investment decision behind it.