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

Capital gains tax is the tax you pay on profits from selling investments. The rate depends on how long you held the investment.

Two Types of Capital Gains

Short-Term Capital Gains

• Holding period: Less than 12 months
• Tax rate: Your ordinary income tax rate (10%-37%)
• Example: Buy stock at $100, sell at $120 after 6 months = $20 gain taxed at your rate

Long-Term Capital Gains

• Holding period: 12 months or longer
• Tax rate: Preferential rates (0%, 15%, or 20%)
• Example: Buy stock at $100, sell at $150 after 2 years = $50 gain taxed at 15% or 20%

Long-Term Capital Gains Rates (2026)

Example: Tax Impact

Sell stock with $10,000 gain:

Scenario 1: Short-term (6 months)

• Ordinary income rate: 24%
• Tax owed: $2,400
• After tax: $7,600

Scenario 2: Long-term (2 years)

• Long-term rate: 15%
• Tax owed: $1,500
• After tax: $8,500
• Difference: $900 saved by waiting

Minimizing Capital Gains Tax

1. Hold investments 12+ months

• Qualifier for lower tax rates
• Biggest single tax saver

2. Tax-Loss Harvesting

• Sell losing investments
• Offset capital gains dollar-for-dollar
• Can deduct up to $3,000/year excess

Example:

• Sell winners: +$5,000 gain
• Sell losers: -$3,000 loss
• Net: +$2,000 gain taxed

3. Use Tax-Advantaged Accounts

• IRA: No taxes on gains until withdrawal
• 401(k): Tax-deferred growth
• HSA: Tax-free withdrawals for medical

4. Donate appreciated securities

• Deduct fair market value as charity
• Avoid capital gains tax
• Get tax deduction

Related articles:

• Investment Account Types
• Taxable vs Tax-Advantaged Accounts
• Tax-Loss Harvesting