Capital Gains Tax — Short vs Long Term

Hold one extra day past a year and the IRS takes far less.

The One-Year Rule That Changes Everything

Hold an asset for one year or less → short-term gain → taxed at your ordinary income rate (up to 37%).

Hold it for more than one year → long-term gain → taxed at 0%, 15%, or 20% depending on your income.

On a $10,000 gain, that difference could mean paying $2,200 (22% bracket, short-term) vs $0 (single filer below $48,350, long-term). Holding one extra day past the one-year mark can be worth thousands.

Short-Term vs Long-Term Gains

Short-Term Gains: asset held ≤ 1 year, taxed as ordinary income, rate 10%–37% — same rate as your salary, no special treatment.

Long-Term Gains: asset held > 1 year, preferential tax rates of 0%, 15%, or 20% — can be 0% for most middle-income filers. Qualified dividends are treated the same way.

2025 Long-Term Capital Gains Rates — Single Filers

Rate	Taxable Income	Note
0%	$0 – $48,350	Most middle-income investors qualify here
15%	$48,351 – $533,400	Standard rate for most high-income earners
20%	$533,401+	Top earners — rare to hit this threshold

Married Filing Jointly thresholds: 0% up to $96,700; 15% from $96,701–$600,050; 20% above $600,051.

NIIT (3.8% surtax) also applies above $200K single / $250K MFJ on top of these rates.

The 0% rate — a massive opportunity most people miss. Single filers with taxable income below $48,350 (MFJ: $96,700) pay zero federal tax on long-term capital gains and qualified dividends. This is huge for early retirees with low ordinary income, part-time workers or people between jobs, retirees drawing down accounts strategically, and parents who gift appreciated assets to lower-income adult children. Strategic gain harvesting — intentionally realizing gains in low-income years at 0% — is one of the most powerful and underused tax moves available.

Real Example — Same Gain, Very Different Bill

Single filer, 22% ordinary income bracket, sold a stock for a $20,000 gain:

Scenario	Rate	Tax Owed
Held 8 months (short-term)	22%	$4,400
Held 13 months (long-term)	15%	$3,000
Held 13 months + taxable income below $48,350	0%	$0

Common mistake: high earners above $200,000 (single) / $250,000 (MFJ) also owe the Net Investment Income Tax (NIIT) — an additional 3.8% on investment income including capital gains. This means the effective top rate on long-term gains is 23.8% (20% + 3.8%), not just 20%. It applies to taxable accounts only — not gains inside retirement accounts.

Key Terms

• Short-Term Capital Gain: profit from selling an asset held for one year or less. Taxed as ordinary income at your regular bracket rate — no special treatment.
• Long-Term Capital Gain: profit from selling an asset held for more than one year. Taxed at preferential rates of 0%, 15%, or 20% depending on your income.
• Cost Basis: the original price you paid for an asset (plus commissions). Capital gain or loss = sale price minus cost basis. Gifted and inherited assets use different basis rules.
• NIIT (Net Investment Income Tax): a 3.8% surtax on investment income (including capital gains) for high earners above $200,000 (single) / $250,000 (MFJ). Adds on top of the regular capital gains rate.

Key Takeaways

• Hold > 1 year → long-term rate (0%, 15%, 20%) vs ordinary income rate (up to 37%).
• 2025 single: 0% on LTCG up to $48,350 taxable income; MFJ: up to $96,700.
• The 0% bracket is a powerful planning opportunity in low-income years.
• Qualified dividends are taxed at the same preferential long-term rates.
• NIIT adds 3.8% on investment income above $200K/$250K AGI.
• Gain harvesting (realizing gains at 0%) is one of the most underused tax strategies.