Short-term vs. long-term capital gains: How to trim your tax bill

The federal government encourages Americans to invest, but Uncle Sam wants a cut of any profits. Capital gains are the financial profit you earn when you sell an asset like a home, business or stocks and bonds. These gains are subject to capital-gains taxes.

As with other taxes you pay on earnings, the amount of capital-gains tax you must pay on profitable investments will depend on your taxable income and filing status. But how long you owned that asset is actually the bigger differentiator in how much tax you’ll pay on capital gains.

To maximize your profit, it’s important to be mindful of the differing rates you’ll pay for short-term vs. long-term capital gains. Gains on investments that you’ve owned for one year or less — short-term capital gains — are taxed at the same rate as ordinary income. Assets you’ve owned for longer than a year — long-term capital gains — are typically taxed at a much lower rate, or even not taxed at all, depending on your income and filing status.

What is a capital gain?

A capital gain is typically calculated in a fairly straightforward manner: It’s the difference between the amount you sold an asset for versus the cost basis (what you paid for it, plus additional expenses in some cases). There are exceptions to that calculation; for example, the IRS treats cost basis differently for assets received as a gift or inheritance.

Anytime you sell an asset for more than you bought it for, you’ve “realized” a capital gain. That’s when taxes will potentially kick in, depending on what the asset was, how long you held it and your taxable income and filing status. By contrast, you may have “unrealized” capital gains on assets that have appreciated in value since you bought them, but those gains aren’t taxable until you sell the assets.

A variety of assets may be subject to capital-gains taxes, including:

• Financial assets such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), commodities and cryptocurrency
• Vehicles
• Home furnishings
• Business assets
• Partnerships and limited liability companies (LLCs)

Special rules for capital gains taxes and rates may apply to the profitable sale of various types of real estate and collectibles, so it’s important to check the IRS rules.

If you sold an asset for less than you bought it, that’s known as a capital loss. The IRS doesn’t tax you on losses and you may be able to reduce your taxable income with capital losses.

Short-term vs. long-term capital gains

The IRS classifies capital gains (and losses) into two categories — short-term or long-term — and the general rule it uses to differentiate them is the one-year mark. If you sell an asset that you’ve held for one year or less, the IRS considers this a short-term capital gain or loss.

Meanwhile, if you’ve owned an asset for longer than a year, that’s a long-term capital gain or loss. (There are some exceptions to this rule.)

The IRS typically offers more favorable tax rates for long-term capital gains. Short-term capital gains are taxed at the same rates that apply to your ordinary income, which ranges from 10 percent to 37 percent in 2024 and 2025. Long-term capital gains, on the other hand, are taxed at rates of 0 percent, 15 percent or 30 percent in 2024 and 2025.

With both short- or long-term capital gains, the IRS is focused on the net gain — meaning the difference between your net capital gains for the year minus your net capital losses.

Short-term capital gains tax rates

Short-term capital gains are treated like ordinary income, which means you’ll be taxed at the rate that applies to you based on your taxable income and filing status. The income tax rates for the seven brackets are: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.

If you realized a net short-term capital gain in 2024, the following tax rates will apply:

2024 tax brackets (for tax returns due in 2025)

If you realize a net short-term capital gain in 2025, the following tax rates will apply:

2025 tax brackets (for tax returns due in 2026)

Long-term capital gains tax rates

Lower tax rates will generally apply to the net long-term capital gains you realized on assets that you owned for longer than one year. There are only three tax brackets for long-term capital gains in 2024 and 2025.

If you realized a net long-term capital gain in 2024, the following tax rates will apply:

2024 long-term capital gains tax rates

If you realize a net long-term capital gain in 2025, the following tax rates will apply:

2025 long-term capital gains tax rates

How to reduce your capital gains

It may be difficult to completely avoid paying taxes on capital gains, depending on what assets you sell in a given year. But you may be able to reduce or potentially eliminate your capital gains tax burden with the following strategies:

1. Hold assets for longer than a year before you sell. If you’re looking to sell a stock in your portfolio, check to see when you bought it. By waiting to sell until that one-year mark passes, you will qualify for a lower tax rate on the profit you earned.
2. Offset capital gains with capital losses. A strategy known as tax-loss harvesting allows you to offset your capital gains with capital losses, which will then reduce your overall capital gains tax liability (though you need to be aware of what’s known as the wash-sale rule). Long-term losses offset long-term gains, while short-term losses can offset short-term gains, and net capital losses could reduce your taxable income by up to $3,000 a year.
3. Carry over losses into the next year. If you have net capital losses that exceed $3,000, you may be able to carry an excess amount into the next tax year — and beyond.
4. Maximize the benefits of tax-free accounts. Money that you set aside for long-term goals like retirement, your child’s education and health savings can grow tax-free or tax-deferred in accounts like an IRA, 401(k), 529 plan or a health savings account (HSA). Any investments that you sell at a profit in these accounts aren’t subject to the capital gains tax — that’s why some investors opt to trade stocks, ETFs and other investments in an IRA rather than a taxable brokerage account, thereby minimizing their tax liability.