Capital Gains Tax Rates: Short-term vs. Long-term

Capital gains are the profits you make when you sell an investment for more than you paid for it. Capital gains can apply to almost any investment that is sold at a profit, such as stocks, bonds, real estate, precious metals, options contracts, or even cryptocurrency. These gains may be subject to capital gains tax, depending on how long you held the asset.

Capital gains are calculated by comparing the price you sell an asset for with its cost basis (generally what you paid to acquire it), plus or minus certain adjustments.

At a basic level, the formula looks like this:

Capital gain = sale price − cost basis

The sale price is the amount you receive when you sell the asset, minus any transaction costs or brokerage fees.

Cost basis typically includes the purchase price of the asset, plus commissions or fees paid at purchase. In some cases, the basis may be adjusted over time—for example, by reinvested dividends, improvements to real estate, or depreciation.

For example, if you bought a stock for $10,000 and later sold it for $15,000 (after fees), your capital gain would be $5,000.

If you sold an asset for less than your cost basis, you would have a capital loss, which may be used to offset other capital gains—a process known as tax-loss harvesting. If you have any losses left over, you may be able to offset up to $3,000 of your ordinary income with that loss.

Capital gains and losses from taxable investment sales are generally reported on Schedule D of your federal tax return, along with supporting details from Form 8949.

While the calculation itself is straightforward, how much tax you owe on a capital gain depends on additional factors, most notably how long you held the asset before selling it. Short‑term and long‑term capital gains are taxed differently, making the holding period an important planning consideration.

The Internal Revenue Service (IRS) categorizes capital gains as short‑term or long‑term based on how long you owned the asset before selling it, and that distinction can have a major impact on your tax bill. While the math used to calculate a capital gain is the same regardless of how long you hold an asset, the tax rate applied to that gain can differ significantly. Understanding the difference between short‑term and long‑term gains can help investors make more tax‑efficient decisions about when to sell and how to plan around potential tax liabilities.

Short‑term capital gains apply to assets held for one year or less. These gains are taxed at your ordinary income tax rate, the same rate that applies to wages and other earned income. Because ordinary income tax rates are generally higher than long‑term capital gains rates, short‑term gains can result in a larger tax hit, especially for higher‑income taxpayers.

Long‑term capital gains apply to assets held for more than one year before being sold. These gains benefit from preferential tax rates, which are typically lower than ordinary income tax rates and are based on your overall taxable income.

In addition to standard capital gains tax rates, certain high-income earners may also owe an extra 3.8% net investment income tax (NIIT) on investment income.

Capital gains taxes generally apply only to investments held in taxable accounts. Investments held in tax‑advantaged retirement accounts (including 401(k) plans, traditional IRAs, and Roth IRAs), as well as 529 college savings plans, are not subject to capital gains taxes when assets are bought or sold within the account. Instead, these accounts follow their own tax rules, which may allow investments to grow on a tax‑deferred or tax‑free basis, depending on the account type and how withdrawals are made.

If you sell an investment for less than you paid for it, you realize a capital loss. Fortunately, investment losses have a silver lining: You can use capital losses to offset other capital gains, reducing your overall tax bill. If total capital losses exceed your capital gains, you can deduct up to $3,000 of the excess losses against other types of income, such as wages. Any remaining losses beyond the $3,000 deduction can be carried forward to offset future income.

The tax benefits from capital losses are often good enough that many tax savvy investors regularly look for losses in their portfolios so they can use them for tax-loss harvesting. But you do have to be careful when strategically realizing losses to avoid the wash sale rule, which could reduce or remove the potential tax benefits of loss harvesting.

There are many other asset classes out there with their own unique tax rules.

Futures contracts, options on futures, and options on broad-based indexes are subject to Internal Revenue Code Section 1256 (a.k.a 1256 contracts). These types of assets get special tax treatment called the 60/40 rule, where 60% of any gains are taxed at the lower long-term capital gains rate and 40% at the ordinary income tax rate. In addition, if you hold Section 1256 contracts, they're subject to the mark-to-market rule. If you hold these assets through the end of a calendar year, you'll have to recognize an unrealized gain or loss based on the fair market value on December 31.

Gains from the sale of collectibles, such as art, antiques, coins, and precious metals (including gold), are subject to a higher long-term capital gains tax rate of 28%. Shorter-term gains on collectibles are taxed at the ordinary income tax rates.

Cryptocurrencies are taxed differently than most people expect. While cryptocurrencies, like bitcoin, are often thought of as digital currencies, the IRS disagrees. The IRS does not consider them to be a currency. In the IRS's eyes, they are "property," which means cryptocurrencies are subject to the same long- and short-term capital gains tax rates as other investments.

When you sell or trade cryptocurrencies for another asset (or even for a different cryptocurrency), you create a taxable event, and any gain realized needs to be reported on your tax return. Even if you don't get a Form 1099 for a cryptocurrency transaction, it still needs to be reported on your tax return. Also be aware that using cryptocurrency to buy goods or services is also a taxable event because you exchanged the cryptocurrency for something.

Capital gains can meaningfully affect your finances, particularly when it comes to how and when you sell investments. Tax rates, holding periods, and special rules for different asset classes all influence whether a gain is taxable and how much you may owe. In some situations—especially when transactions become more complex—working with a qualified tax professional or financial advisor can help clarify how the rules apply to your specific circumstances.

Yes. If you sell your primary residence, you may be able to exclude a significant portion of the gain from capital gains tax. Under IRS rules, eligible homeowners can exclude up to $250,000 of capital gains if filing single, or $500,000 if married filing jointly. To qualify for the home sale tax exclusion, you must generally have owned and lived in the home for at least two of the five years preceding the sale. Any gain above the exclusion amount may be subject to capital gains tax.

Capital gains rules differ for assets received as a gift or inheritance. In most cases, inherited assets receive a step‑up in cost basis to their fair market value on the original owner's date of death, meaning gains are calculated using that adjusted value when the asset is sold. Inherited assets are generally treated as long‑term. By contrast, when an asset is received as a gift, the recipient typically assumes the original owner's cost basis and holding period, which can affect how future gains are taxed.

Yes. Reinvesting the proceeds from a sale does not eliminate or defer capital gains taxes in a taxable account. When a capital asset is sold at a profit, the gain is generally taxable in the year of the sale, even if the proceeds are immediately reinvested. Capital gains taxes are triggered by the sale itself, not by how the proceeds are used.

When you buy the same investment at different times and prices, each purchase is treated as a separate lot with its own cost basis and holding period. This commonly applies to stocks, ETFs, and mutual funds purchased over time. The method used to determine which lots are sold can affect both the size of the gain and whether it is treated as short‑term or long‑term, making cost‑basis tracking an important part of tax‑efficient investing.