Whenever you sell something for more than you paid for it, you generate a profit. And the government wants a cut of your profit even when it 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 and long-term capital gains can help you optimize your portfolio so that Uncle Sam doesn’t take more than he should from your earnings.
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.
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 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 how long you 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 made more than $48,476 in 2025, 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 $48,476, 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 it's important to know the difference between short-term capital gains and long-term capital gains when making investment decisions.
2025 Tax Year Rates for Short-Term Capital Gains
For assets purchased and sold in the same year, your short-term capital gains tax rates are based on the following income brackets:
| Tax rate | Single | Married filing separately | Married filing jointly | Head of household |
|---|---|---|---|---|
| 10% | $0 to $11,925 | $0 to $11,925 | $0 to $23,850 | $0 to $17,000 |
| 12% | $11,926 to $48,475 | $11,926 to $48,475 | $23,851 to $96,950 | $17,001 to $64,850 |
| 22% | $48,476 to $103,350 | $48,476 to $103,350 | $96,951 to $206,700 | $64,851 to $103,350 |
| 24% | $103,351 to $197,300 | $103,351 to $197,300 | $206,701 to $394,600 | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 | $197,301 to $250,525 | $394,601 to $501,050 | $197,301 to $250,500 |
| 35% | $250,526 to $626,350 | $250,526 to $375,800 | $501,051 to $751,600 | $250,501 to $626,350 |
| 37% | $626,350+ | $375,800+ | $751,600+ | $626,350+ |
2025 Tax Year Rates for Long-Term Capital Gains
For assets sold in 2025 that have been held for longer than a year, the following capital gains tax rate brackets apply:
| Tax rate | Single | Married filing separately | Married filing jointly | Head of household |
|---|---|---|---|---|
| 0% | $0 to $48,350 | $0 to $48,350 | $0 to $48,350 | $0 to $48,350 |
| 15% | $48,350 to $533,400 | $48,350 to $300,000 | $96,700 to $600,050 | $64,750 to $566,700 |
| 20% | $533,400+ | $300,000+ | $600,050+ | $566,700+ |
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 from 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.
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
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. 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.
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.
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