How Capital Gains Tax Works

A capital gain is the profit you make when you sell something for more than you paid — a stock, a fund, a rental property, even cryptocurrency. The tax you owe on that gain depends almost entirely on one thing: how long you owned the asset before selling.

Short-term vs long-term

The dividing line is one year. Sell an asset you held for a year or less and the profit is a short-term gain, taxed at your ordinary income tax rate — the same brackets that apply to your salary. Hold it for more than a year and it becomes a long-term gain, taxed at preferential rates that are usually much lower.

• Short-term (held one year or less) — taxed as ordinary income, up to 37%.
• Long-term (held more than one year) — taxed at 0%, 15%, or 20% depending on your taxable income.
• Most middle-income taxpayers fall in the 15% long-term bracket.

Why the holding period is worth planning around

The gap between the two treatments is large. A high earner could pay 37% on a short-term gain versus 20% on the same gain held just a few weeks longer. If a sale is close to the one-year mark, waiting until you cross it can meaningfully cut the tax bill — though you should never let the tax tail wag the investment dog if the position has become too risky to hold.

Losses cut your bill

Capital losses offset capital gains dollar for dollar, and if your losses exceed your gains you can deduct up to $3,000 against ordinary income each year, carrying the rest forward. Deliberately realizing losses to offset gains is called tax-loss harvesting. Note too that gains inside tax-advantaged accounts like a 401(k) or IRA are not taxed as you trade — only when you withdraw, and under different rules.

Estimate the tax on a sale, and see the difference the holding period makes, with the calculators below.