Short-Term vs Long-Term Capital Gains
Holding 366+ days vs 365 days saves up to 17 percentage points in tax. Here's what the difference looks like.
Hold ≤ 1 year: short-term gains, taxed as ordinary income (10–37% federal). Hold > 1 year: long-term gains, taxed at preferential rates (0%, 15%, or 20%). The IRS counts holding period from the day after acquisition to the day of sale.
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Short-Term Capital Gains Tax
Federal + state tax on short-term gains (held <1 year).
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Long-Term Capital Gains Tax
Federal + state tax on long-term gains (held >1 year).
Key Differences
| Aspect | Short-Term Capital Gains Tax | Long-Term Capital Gains Tax |
|---|---|---|
| Holding period | ≤ 365 days | > 365 days |
| Tax rate | 10%–37% (ordinary) | 0%, 15%, or 20% |
| On $10,000 gain (24% bracket) | $2,400 tax | $1,500 tax |
| NIIT (3.8%) | Possibly | Possibly (high income) |
| State tax | Varies | Same as ordinary in most states |
When to use Short-Term Capital Gains Tax
- Trades closing within 365 days
- Day-trading or short-term active strategies
- Frequent rebalancing inside taxable accounts
When to use Long-Term Capital Gains Tax
- Buy-and-hold positions
- Index fund investors
- Long-term retirement-bound holdings
Frequently Asked Questions
Is a 1-day timing difference really worth tens of thousands of dollars?
Yes. On a $100k gain, the difference between short-term (37%) and long-term (20%) tax is $17,000. Selling on day 365 vs day 366 is a $17,000 mistake at the top bracket.
Can I offset short-term gains with long-term losses?
Yes. Capital losses offset gains of the same type first; net excess of one type can offset the other. Excess losses up to $3,000/year can offset ordinary income.