Short-term vs. long-term Capital gains: Whenever you sell something for more than you paid for it, you generate a profit. Uncle Sam wants a cut of your profit even when that profit comes from the sale of an asset like a stock.
This is what’s referred to as capital gains. Depending on how long you’ve held an asset, you’ll be charged capital gains taxes on any profit you earn from it. Understanding the difference between short-term vs. long-term capital gains can help you optimize your portfolio so that Uncle Sam doesn’t take more than he should from your earnings.
In this article, we’ll dive into the difference between short- and long-term capital gains and why it matters for every investor, no matter the size of your portfolio.
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- When you sell an asset and earn a profit you create a capital gain that is taxed by the Internal Revenue Service (IRS)
- The amount of capital gains taxes you’ll pay depends on how long you’ve held an asset and your income
- Short-term capital gains are usually taxed as ordinary income while long-term capital gains can be taxed anywhere from 0% to 20%
What are capital gains?
A capital gain is the profit that’s generated from the sale of an asset like a house or a stock. This creates a taxable event that is reported to the IRS. Capital gains are calculated by deducting the adjusted cost basis from the price of the sale. For example, if you purchased a stock for $10 and sold it for $100, your capital gain on that stock is $90.
Tip: To buy a stock, you need to start by opening an account with a brokerage platform like Webull. Once you've funded your account, you can use the platform's search function to find the stock you want. Since Webull uses real-time data and commission-free trading, investing in stocks using this platform is accessible even for beginners.
While real estate and stocks are some well-known assets that generate capital gains, they aren’t the only ones. Physical property, businesses, cars, and collectibles like fine art and rare wine can also generate capital gains (and hence be subject to capital gains taxes) when they’re sold.
Most assets are taxed at either the short- or long-term capital gains tax rate. The rate you’re taxed at is determined by your income. Short-term capital gains follow the federal tax bracket you fall in while long-term capital gains are taxed at 0%, 15%, or 20%.
Some assets, however, are taxed separately. Collectibles, for example, are subject to a flat capital gains tax rate of 28%, regardless of how much money you make during the year.
There are some exceptions to how capital gains are assessed. Qualified small business stock and the first $250,000 from the sale of your primary residence typically don’t incur capital gains. Meanwhile, if you are a high-income earner, your investment income might incur an additional 3.8% net investment income tax.
Short-term vs. long-term capital gains
How much you’ll pay in capital gains taxes comes down to the length of time you’ve held an asset. If you’re selling an asset you’ve held for less than a year you’ll have to pay short-term capital gains. Assets held for more than a year are considered long-term capital gains. Depending on your income tax bracket, long-term capital gains tax rates tend to be lower than tax on short-term capital gains.
Short-term capital gains are typically assessed at your current tax rate based on the federal tax bracket. For example, if you make more than $44,725, your tax rate is 22%. While this might not seem like a lot it’s actually higher than the long-term capital gains tax rate for a similar income.
Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income. If your taxable income is less than $47,025, for example, your long-term capital gains tax rate would be 0%. That’s a significant savings compared to the short-term capital gains tax rate and it’s why knowing the difference between short-term capital gains and long-term capital gains is important to be aware of when making investment decisions.
By understanding the impact of short-term vs. long-term capital gains on your investments, you can use advanced strategies like tax-loss harvesting to reduce the amount of money you have to pay in capital gains taxes. By keeping more of your money invested instead of paying taxes, you can watch your investments grow faster.
Short-term capital gains taxes: 2024 rates
Short-term capital gains taxes follow the federal income tax bracket you fall in. For assets purchased and sold in the same year, expect to pay the following in short-term capital gains taxes.
| 2024 short-term capital gains | |||||||
Tax Filing Status | Tax Rate | ||||||
| 10% | 12% | 22% | 24% | 32% | 35% | 37% | |
| Single | $0 to $11,600 | $11,600 to $47,150 | $47,150 to $100,525 | $100,525 to $191,950 | $191,950 to $243,725 | $243,725 to $609,350 | Above $609,350 |
| Head of household | $0 to $16,550 | $16,550 to $63,100 | $63,100 to $100,500 | $100,500 to $191,950 | $191,950 to $243,700 | $243,700 to $609,350 | Above $609,350 |
| Married filing jointly | $0 to $23,200 | $23,200 to $94,300 | $94,300 to $201,050 | $201,050 to $383,900 | $383,900 to $487,450 | $487,450 to $731,200 | Above $731,200 |
| Married filing separately | $0 to $11,600 | $11,601 to $47,150 | $47,151 to $100,525 | $100,525 to $191,950 | $191,951 to $243,725 | $243,726 to $365,600 | Above $365,600 |
Long-term capital gains taxes: 2024 rates
For assets sold in 2024 that have been held for longer than a year, the following capital gains tax rates will apply when you file your taxes.
| 2024 Long term capital gains | |||
Tax Filing Status | Tax Rate | ||
| 0% | 15% | 20% | |
| Single | $0 to $47,025 | $47,026 to $518,900 | Above $518,900 |
| Head of household | $0 to $63,000 | $63,001 to $551,350 | Above $551,350 |
| Married filing jointly | $0 to $94,050 | $94,051 to $583,750 | Above $583,750 |
| Married filing separately | $0 to $47,025 | $47,026 to $291,850 | Above $291,850 |
Short-term vs. long-term: How can capital losses affect your taxes?
Capital losses are similar to capital gains but instead of making money, you lose money. Losses can help offset capital gains and reduce the amount of capital gains taxes you’ll have to pay. The IRS allows you to deduct up to $3,000 in losses on your taxable income. That can reduce the amount of money you’ll pay in taxes and it can possibly move you into a lower tax bracket too, saving you even more come tax time.
Depending on your income and how long you hold an asset, you can wind up paying a sizable portion of your profit in capital gains taxes. Claiming a loss instead can help offset this. Some investors deliberately offset capital gains using strategies like tax loss harvesting.
Related: How Do Taxes Work?
FAQs
Short-term vs. long-term: How do I avoid short-term capital gains?
The best way to avoid short-term capital gains is to hold onto an asset for more than a year. Keeping an asset for a year or more will turn any gains into long-term capital gains. While this might not avoid capital gains taxes entirely, it will substantially reduce your tax bill, especially if you are in a higher tax bracket.
Short-term vs. long-term: What is an example of a long-term capital gain?
An example of a long-term capital gain is selling a house. According to the National Association of Realtors, the average homeowner owns their home for 13 years. A primary residence sold after owning it for at least a year would qualify for long-term capital gains. For single filers, the first $250,000 in gains is excluded from a capital gains tax, while the exclusion is $500,000 for married filers.
Related: How To Start Investing?
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