Short-Term vs. Long-Term Capital Gains
In brief
Federal tax law generally treats gains from capital assets held one year or less as short-term and gains from assets held more than one year as long-term, with different rate structures and netting rules.
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The main idea
Holding period affects tax character, but tax character should be one input—not the only reason to keep or sell an investment.
At a glance
Short-term
One year or less
Net short-term capital gains are generally taxed as ordinary income.
Internal Revenue Service ↗Long-term
More than one year
Net long-term capital gains may receive lower federal rate treatment, subject to the return as a whole.
Internal Revenue Service ↗Measurement
Day after purchase
Publication 550 explains how the holding period begins and how the disposition date is treated.
Internal Revenue Service ↗The calendar controls the character
The holding-period test is based on dates, not an investor’s intention to invest for the long term. Separate tax lots of the same security can therefore produce different short- and long-term results.
Inherited property, gifts, options, short sales, and certain distributions can follow special rules. Do not apply the ordinary stock-lot rule to a transaction that the IRS treats differently.
Tax-aware is not tax-controlled
Waiting for long-term treatment can reduce federal tax in some cases, but it can also leave a concentrated or unsuitable position exposed. Compare the potential tax difference with investment risk, transaction costs, and the purpose of the portfolio.
A realized gain also interacts with losses, income, filing status, state law, and possible surtaxes. A headline capital-gains rate cannot determine the final tax by itself.
Sources: Internal Revenue Service
Before acting
Questions to verify
- Check the exact lot dates.
- Separate short- and long-term transactions.
- Review unrealized concentration risk.
- Consider state treatment.
- Use current tax-year instructions.
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