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

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:

Common Mistakes to Avoid

• Selling just before the one-year mark: Selling even a day early converts the entire gain from long-term to short-term, which can mean paying ordinary income rates instead of the much lower preferential rates.

• Forgetting the NIIT above $200K/$250K: High earners above $200,000 (single) / $250,000 (MFJ) also owe the Net Investment Income Tax — 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.

• Overlooking the 0% bracket in low-income years: Retirees, part-time workers, or anyone with a temporarily low income year can often realize long-term gains completely tax-free — but only if they check their taxable income against the threshold before selling.

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.

Quick Summary

• 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

Frequently Asked Questions