Short-Term vs. Long-Term Capital Gains

Short-Term vs. Long-Term Capital Gains

Buying and selling stocks, metals, jewelry, real estate, and bonds are a regular affair amongst most people. These capital assets can mean loads of profit to the seller. When you make such profits, the resultant term is known as ‘capital gains’ which are taxable.

There are two types of capital gains to input on your taxes - short and long-term capital gains. Continue reading to delve into the differences between these types.

Types of Capital Gains

As their names suggest, the holding period differentiates the two types of capital gains. Here’s a brief look with an example.

Short-term Capital Gains

Consider you hold an asset for one year or less. At the right time, you sell this asset and cash in on the profit. That profit applies to your ‘short term capital gains’ because you held it for one year or less. Essentially the profit is added to your ordinary income (along with wages, self employment income, etc).

Short term capital gains are taxed at your standard tax rate which varies from 10% to 37%.


Imagine you sell shares in a mutual fund for a profit of $30,000. However, the holding period of the shares was under one year. Consequently, you need to pay short-term capital gains tax. This gain would be counted as part of your annual taxable income in the tax year that you sold it.

So, if you pay $40,000 in taxes from your salary, your total gross taxable income would be 40,000 + 30,000= $70,000 (for this example).

Long-term Capital Gains

If the holding period of your asset is over one year, the profits from selling are ‘long term capital gains.’ Taxes on these gains are lower compared to short term capital gains. 

The long term capital gains rate varies based on your annual income plus your total capital gains for that year. The good news is long term capital gains are not added to ordinary income and do not increase the marginal tax rate applied to your income.


Consider the same example above with the mutual fund shares. Only in this case, you kept the shares for over a year.

The long-term capital gains tax will not be connected to your regular income tax bracket. There are three rate tiers depending on your income PLUS the long term capital gain amount — 0%, 15%, and 20%

  • 0% for income + gains less than $40,400 (filing single) or $80,800 (married filing jointly).
  • 15% for income + gains between $40,400 - $445,850 (filing single) and $80,800 - $501,600.
  • 20% for amounts higher than the above.

So, in this example, the income plus gains is $70,000. You would pay 0% on the first $400, then 15% on the remaining $29,400 log term capital gain. 

Short-term and long-term capital gains comparison

Here are the tax tables for short term vs long term capital gains depending filing status and income level.

Table: Short-term capital gains tax rates (Source)

Tax rate (%)


Married couples (Joint filing)

Head of household


Up to $10,275

Up to $20,550

Up to $14,650


$10,276 - $41,775

$20,551 - $83,550

$14,651 - $55,900


$41,776 - $89,075

$83,551 - $178,150

$55,901 - $89,050


$89,076 - $170,050

$178,151 - $340,100

$89,051 - $170,050


$170,051 - $215,950

$340,101 - $431,900

$170,051 - $215,950 


$215,951 - $539,900

$431,901 - $647,850

$215,951 - $539,900


Over $539,900

Over $647,850

Over $539,900

Compared to this tax bracket table, the long-term gains taxes are much simpler.

Table: Long-term capital gains tax rates (Source)

Tax rate (%) 


Married couples (Joint filing)

Head of household


Up to $41,675

Up to $83,350

Up to $55,800


$41,676 - $459,750

$83,351 - $517,200

$55,801 - $488,500


Over $459,751

Over $517,200

Over $488,500

Thus, long-term capital gains taxes are lower compared to their short-term counterparts.

Taxpayers interested in minimizing taxes should therefore focus on holding their assets for longer durations.

Additionally, if you live in a state that does not charge a personal income tax, you are in luck. Residents from Nevada, New Hampshire, Alaska, Florida, South Dakota, Tennessee, Washington, and Wyoming do not have capital gains tax.

Tips for savings and common exceptions

As an investor, you should focus on minimizing short-term capital gains. Here are some valuable tips.

1. Benefit from qualified small business stock (QSBS)

QSBS are shares of qualified small businesses. Companies in the retail, wholesale, manufacturing, and technology sectors fall under the QSB category.

If you acquired QSBS after 2010, there is a 100% capital gains exclusion for non-corporate investors.

2. Hold assets longer

This is a straightforward tip. You can save money going into tax season by holding assets for at least one year. Consequently, you will qualify for long-term capital gains and pay less taxes. 

However, this strategy is subjective. For instance, you might need to sell a particular asset within a year due to an undesirable financial emergency. In this case, you are no longer in a position to convert the asset into long-term capital gains.

So, holding the assets for over a year will vary as per your financial needs. In routine cases, this strategy can prove successful.

3. Offset gains with losses

Consider selling a capital asset for a lower value than the actual purchase price. As opposed to a profit, this counts as a loss. For both short term and long term capital gains - losses offset gains. So, you can end up saving money spent on taxes if you have both losses and gains in a given tax year.

4. Exceptions

Keep an eye on general capital asset exceptions. For instance, collectibles are taxed at a rate of 28%. If you have a high income, you will need to pay an extra 3.8% net investment additional tax, including your capital gains. 

Investors should also be aware of the wash sale rule which applies to selling an asset at a loss and purchasing similar or identical security in 30 days (before or after). Wash sales are not allowed to be counted as losses.

5. Loss Carry Forward

If you only had losses in a given year, you can deduct up to $3,000 of short-term losses from ordinary income. Consequently, you must carry any exceeding amount into the following year. 

So, if you had a $6,000 loss on a stock that you held for less than a year (and no other gains), you could reduce your taxable income by $3,000 in the year you sold it.. Further, you can deduct $3,000 in the following year.


To sum up, if possible, hold on to your capital assets for at least over a year. This way, you will avoid the high tax rates on short-term capital gains.

Furthermore, use the four tips listed above to formulate your tailor-made strategy. Proper planning and tactics can help reduce your taxes on capital gains. 

The post Short-Term vs. Long-Term Capital Gains is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in
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