Short-Term vs. Long-Term Capital Gains: What's the Difference?

When you sell an investment for more than you paid for it, you realize a capital gain. But not all capital gains are taxed the same way. In the U.S., the amount of tax you owe depends heavily on how long you held the investment before selling it.

In this post, we'll break down the difference between short-term and long-term capital gains, and how each one affects your taxes.

What Are Short-Term Capital Gains?

Short-term capital gains occur when you sell an investment that you've held for one year or less.
These gains are taxed at your ordinary income tax rate, which means they could be significantly higher depending on your income bracket.

Key points:

• Holding period: 1 year or less
• Taxed as regular income (up to 37% depending on income)
• Applies to stocks, bonds, cryptocurrencies, real estate, and other assets

Because short-term gains are taxed at higher rates, many investors try to avoid frequent buying and selling unless absolutely necessary.

What Are Long-Term Capital Gains?

Long-term capital gains apply when you sell an investment after holding it for more than one year.
The government rewards long-term investing with lower tax rates compared to short-term gains.

2025 long-term capital gains tax rates:

• 0% for low-income earners
• 15% for most taxpayers
• 20% for high-income earners

Long-term investing is often a core strategy for minimizing taxes and growing wealth over time.

Quick Comparison Table

Feature	Short-Term Capital Gains	Long-Term Capital Gains
Holding Period	1 year or less	More than 1 year
Tax Rate	Ordinary income rate (10%-37%)	Preferential rates (0%-20%)
Common Strategy	Quick profits	Long-term wealth growth

Why Does It Matter?

Understanding the difference between short-term and long-term gains is crucial for smart investing.
If you hold investments longer than a year, you can dramatically reduce your tax liability.
Planning your sales based on holding periods can save you thousands of dollars in taxes over time.

Conclusion

Short-term and long-term capital gains are taxed very differently, and knowing the difference can have a major impact on your financial future.
Before you sell your investments, think carefully about how long you've held them and how it will affect your taxes.

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