Tax · February 2, 2026 · 5 min read
Capital Gains Tax Explained: Short-Term vs Long-Term
When you sell an investment for more than you paid, the profit is generally subject to capital gains tax — but how much you owe depends heavily on one factor that's fully within your control: how long you held the asset before selling.
Short-term gains: taxed as ordinary income
If you hold an asset for one year or less before selling, any profit is considered a short-term capital gain and taxed at your regular federal income tax rates — the same progressive brackets that apply to your salary or wages, which can mean rates as high as 37% depending on your total income.
Long-term gains: preferential rates
If you hold an asset for more than one year before selling, the profit qualifies as a long-term capital gain, taxed at preferential rates — generally 0%, 15%, or 20% depending on your total taxable income, all of which are typically lower than ordinary income tax rates for the same income level.
This preferential treatment is a significant incentive to hold investments longer when you have the flexibility to choose your sale timing.
How the brackets stack with your other income
Long-term capital gains brackets are based on your total taxable income, including the gain itself. This means the gain effectively 'stacks' on top of your ordinary income — filling in the lower long-term gains bracket first with your regular income, with the gain itself taxed at whatever rate it falls into above that.
An important additional tax for high earners
Above certain income thresholds, an additional 3.8% Net Investment Income Tax (NIIT) can apply on top of standard capital gains tax, for taxpayers with modified adjusted gross income above set thresholds that vary by filing status.
The holding period difference
A $20,000 gain on an asset sold after 11 months (short-term) for someone with significant other income could be taxed at rates up to 32% or higher depending on their bracket. The same $20,000 gain, if the sale is delayed just one more month to cross the one-year threshold (long-term), might instead be taxed at only 15% — a substantial difference for waiting a single month.
Frequently Asked Questions
Related Calculators
Capital Gains Tax Calculator
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Income Tax Calculator
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Published February 2, 2026. This article is for general informational purposes only — read our disclaimer.