Short-term vs. Long-term capital gains

Published By: Public.com
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Capital Gains Taxes

Understanding capital gains taxes can make a meaningful difference in your investment returns, especially when it comes to distinguishing between short- and long-term capital gains. In the U.S, the IRS taxes capital gains differently depending on how long you’ve owned the asset before selling it. Knowing these differences allows you to plan strategically, reduce your tax burden, and maximize after-tax profits.

If you’re already familiar with the basics of capital gains, you might wonder how short-term gains differ from long-term ones and why it matters. This guide covers the latest 2024-2025 tax rates, explains how to calculate your capital gains taxes, pros and cons of short-term and long-term. Let’s explore how you can approach capital gains with smart tax planning this year.

Table of contents

  1. What are capital gains taxes?
  2. What are short term capital gains​?
  3. What are long-term capital gains?
  4. Short-term vs. Long-term capital gains
  5. How to calculate capital gains tax?
  6. Example of calculating federal capital gains tax
  7. Strategies to manage capital gains taxes
  8. The bottom line

What are capital gains taxes?

Capital gains taxes are the taxes you owe on profits from selling certain types of investments or assets. When you sell an asset, such as stocks, real estate, or other investments, for a higher price than what you initially paid, the profit you make is considered a capital gain. This gain is treated as a form of income, and the IRS requires you to pay taxes on it.

Now, let’s move on to the two primary categories of capital gains that you can be taxed on: short- and long-term capital gains.

FYI: Since the Internal Revenue Service (IRS) views cryptocurrency and digital collectibles as property, any crypto-related gains are subject to capital gains taxes. Real estate home sales also fall under this category.

What are short term capital gains​?

Short-term capital gains apply to assets you’ve held for one year or less before selling. These gains are taxed at the same rate as your ordinary income, which can be anywhere from 10% to 37%, depending on your tax bracket. This means that if you buy a stock and sell it within a few months for a profit, those earnings will be taxed like your paycheck or any other regular income.

For instance, if you’re in a high-income bracket, say 35%, then your short-term capital gains from selling stocks or other assets within a year will also be taxed at that rate. So, for every $1,000 in short-term gains, you could owe up to $350 in federal taxes.

Here’s a table for the 2024 tax brackets ordinary income tax rates based on filing status, useful for understanding short-term capital gains tax rates, as these are taxed at ordinary income rates:

Tax rate For single filers For married individuals filing jointly For heads of households
10% $0 to $11,600 $0 to $23,200 $0 to $16,550
12% $11,600 to $47,150 $23,200 to $94,300 $16,550 to $63,100
22% $47,150 to $100,525 $94,300 to $201,050 $63,100 to $100,500
24% $100,525 to $191,950 $201,050 to $383,900 $100,500 to $191,950
32% $191,950 to $243,725 $383,900 to $487,450 $191,950 to $243,700
35% $243,725 to $609,350 $487,450 to $731,200 $243,700 to $609,350
37% Over $609,350 Over $731,200 Over $609,350

Now, let’s breakdown the 2025 Federal Income Tax Brackets based on filing status, which will help in understanding how your short-term capital gains might be taxed:

Tax rate Single filers Married filing jointly Head of household
10% $0 – $11,925 $0 – $23,850 $0 – $17,000
12% $11,926 – $48,475 $23,851 – $96,950 $17,001 – $64,850
22% $48,476 – $103,350 $96,951 – $206,700 $64,851 – $103,350
24% $103,351 – $197,300 $206,701 – $394,600 $103,351 – $197,300
32% $197,301 – $250,525 $394,601 – $501,050 $197,301 – $250,500
35% $250,526 – $626,350 $501,051 – $751,600 $250,501 – $626,350
37% Over $626,351 Over $751,601 Over $626,351

Source

For instance, if you’re single and your taxable income is $50,000 (including short-term gains), part of it falls under the 22% bracket, so your short-term gains would be taxed at this rate.

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Advantages & disadvantages of short-term capital gains

Pros Cons
Profitable day or swing trades may outweigh the higher tax bill Same rate as federal income tax
Can be tax-deferred with the right retirement account Increases your tax liability at the state and federal level.
Allows for quick profits and liquidity Higher overall tax bill compared to long-term gains
Flexibility to take advantage of market volatility Shorter holding periods may limit compounding growth

What are long-term capital gains?

Long-term capital gains are taxed differently. These gains apply when you’ve held onto an asset for more than a year before selling. The IRS offers a more favorable tax rate for these long-term holdings, with rates set at 0%, 15%, or 20%, depending on your income level.

This tax break is designed to encourage longer-term investing, which can help stabilize markets. So, if you’re in the middle-income bracket, a long-term capital gain might be taxed at 15%, potentially saving you a significant amount compared to the short-term rate.

Let’s say you made a $5,000 profit from selling a stock you held for over a year. If you fall under the 15% long-term rate, you would owe $750 in taxes, as opposed to a higher short-term rate of up to 37%, which would amount to $1,850 in taxes on the same gain.

Here’s a table for the 2024 long-term capital gains tax rates, which apply to gains on assets held for more than one year. These rates are generally lower than ordinary income tax rates:

Tax rate Single filers Married filing jointly Married filing separately Head of household
0% Up to $47,025 Up to $94,050 Up to $47,025 Up to $63,000
15% $47,026 to $518,900 $94,051 to $583,750 $47,026 to $291,850 $63,001 to $551,350
20% Over $518,900 Over $583,750 Over $291,850 Over $551,350

Note: Based on the 2024 tax year thresholds.

For the 2025 tax year, long-term capital gains tax brackets have been adjusted slightly for inflation. Here’s the updated information on tax rates and income thresholds for assets held longer than one year:

Tax rate Single filers Married filing jointly Married filing separately Head of household
0% Up to $49,125 Up to $98,250 Up to $49,125 Up to $66,000
15% $49,126 to $539,900 $98,251 to $605,500 $49,126 to $302,750 $66,001 to $573,300
20% Over $539,900 Over $605,500 Over $302,750 Over $573,300

Source

These thresholds reflect adjustments aimed at accommodating inflation and are typically lower than ordinary income tax rates, making long-term investments more tax-efficient compared to short-term gains. Keep in mind that some states may impose additional capital gains taxes on top of federal rates.

Note: Based on the 2025 tax year thresholds.

Advantages & disadvantages of long-term capital gains

Pros Cons
Beneficial for those with a high adjusted gross income Doesn’t let you take advantage of any big short-term gains that may arise
Defer taxes until you sell your asset down the line Still on the hook for state capital gains taxes
Encourages long-term investments Locked-in capital reduces liquidity
Benefits from compounding over time Complex tax rules and calculations
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Short-term vs. Long-term capital gains

Understanding the key differences between short-term and long-term capital gains can help you plan your investment strategy and minimize taxes. Here’s a quick comparison to clarify how these two types of gains are taxed and how they can impact your overall returns:

Category Short-term Capital Gains Long-term Capital Gains
Holding Period 1 year or less More than 1 year
Tax Rate Taxed at your ordinary income tax rate (10%-37%) Taxed at preferential rates (0%, 15%, or 20%)
Impact on Returns Higher taxes reduce your net profit Lower taxes preserve more of your earnings
Purpose Suitable for short-term trading strategies Encourages long-term investing for lower taxes
Net Investment Income Tax (NIIT) Applicable if income exceeds $200,000 (single) or $250,000 (married) Same NIIT rules apply
State Taxes Taxed as regular income, depending on state Varies by state but usually lower than short-term
Offsetting Losses Can offset gains with capital losses Same as short-term, but losses carry over indefinitely
Examples Day trading, selling stocks within months Holding stocks, ETFs, or real estate for over a year
Tax Forms Reported on Schedule D and Form 8949 Reported on Schedule D and Form 8949

How to calculate capital gains tax?

Check out the Public.com capital gains calculator to quickly figure out how much you’ll owe off your short- and long-term profits.

Our calculator is available to you, regardless of whether you participate in commission-free trading on Public. We’ll simply ask a few questions, such as:

  • What’s the value of your purchase (AKA your cost basis),
  • the sale value,
  • length of ownership,
  • state of residence,
  • tax year,
  • tax filing status,
  • and your taxable income?

Quick Tip: To get a more accurate estimate, use the calculator for all of your short-term gains and then again for all of your long-term gains.

Did you know? Calculating capital gains can be done manually, too. To calculate how much you owe for capital gains on any given asset, you need to collect three pieces of information:

  • The length of time for each asset held, which helps you determine whether they are short-term or long-term capital gains
  • The net capital gain for each type of gain (long- or short-term), which is the difference between your capital losses and capital gains
  • Your ordinary income tax rate, which depends on how much you made for the year, will affect the rate at which your short-term capital gains are taxed.

Example of calculating federal capital gains tax

Learn how federal capital gains tax is applied with these simple examples, making it easier to understand what you might owe when selling investments.

Scenario 1: Long-term capital gains tax

Imagine you bought an investment for $2,000 and held it for five years. After selling it for $5,000, your capital gain is the difference:

$5,000 (sale price) – $2,000 (purchase price) = $3,000 (capital gain).

Since you held the investment for more than a year, it qualifies as a long-term capital gain. Long-term gains are taxed at favorable rates of 0%, 15%, or 20%, depending on your income. At the highest bracket, you’d owe up to $600 in taxes on the $3,000 gain.

Scenario 2: Short-term capital gains tax

Now, let’s say you sold the same investment after holding it for less than a year. This would be classified as a short-term capital gain. Short-term gains are taxed at your ordinary income tax rate, which can range from 0% to 35%. At the highest bracket, you’d owe up to $1,050 in taxes on the $3,000 gain.

Holding investments for over a year can significantly lower your tax bill due to the reduced tax rates on long-term capital gains.

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Things to keep in mind before selling your investments

  • Check whether you’ve hit your price target.

  • Analyze the company’s financials.

  • Compare with other investment opportunities.

  • Take note of any recent or upcoming M&As.

  • Consider how selling a stock will affect your tax bill.

Strategies to manage capital gains taxes

Here’s how you can minimize your tax burden:

  1. Hold investments for more than a year:  Long-term investments often lead to significant tax savings compared to short-term trades.
  2. Harvest tax losses: If you have investments that lost value, you can sell them to offset your gains. This is known as tax-loss harvesting.
  3. Contribute to tax-advantaged accounts: Using accounts like IRAs or 401(k)s can help you defer or avoid capital gains taxes.
  4. Watch out for the wash-sale rule: If you sell a stock at a loss and repurchase it within 30 days, the IRS disallows the loss deduction.

The bottom line

Understanding capital gains taxes is an important part of making informed investment decisions and keeping more of your returns. Public.com offers tools and resources to help you stay on top of your investments and manage your tax obligations. Whether you’re trading stocks, ETFs, or crypto, Public makes it easier to track your investments and stay organized.

It takes just two minutes to join Public and start investing with confidence. Transfer your existing portfolio or build a new one with tools designed to support your financial goals. Start your journey with Public today and take charge of your financial future.

General Dec 2024

Read More: Paying taxes on your stock market gains

Frequently asked questions

1. How much do states tax capital gains?

Most states tax capital gains at rates ranging from 2.9% to 13.3%, in addition to the federal capital gains tax rate.

2. Are there any states that don’t tax capital gains?

Yes, nine states do not have state capital gains taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

3. What is the tax difference between short-term and long-term gains?

The difference between short-term and long-term capital gains lies in the tax rate investors must pay. Short-term capital gains are taxed at 1037% while long-term capital gains are taxed at 020%.

4. What is the maximum capital gains rate?

The maximum federal capital gains tax rate is 37%.

5. When do you have to pay taxes on your stock market profits?

Tax filers must pay stock market profits when they file their taxes.

6. What are the benefits to investing long-term?

Investing long-term with capital gains in mind may lower your tax burden on sale of an asset.

7. How can I minimize capital gains taxes?

Minimize capital gains taxes by holding investments for more than a year before selling. This brings you from higher short-term capital gains to lower long-term capital gains. Talk to a tax professional for tailored advice.

8. When do you need to pay capital gains taxes?

You pay capital gains taxes only when you sell an asset, not while holding it. Report gains on Schedule D when filing taxes, and use losses to offset gains if applicable.

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