Short-term vs long-term capital gains
By Jude Wallis
The gain is identical; the clock decides the rate. Selling for $40,000 what cost $25,000 is a $15,000 gain either way. Held past a year it can meet a 15 percent long-term rate and cost $2,250. Sold sooner it is taxed as ordinary income, $3,300 at a 22 percent rate.
| Short-term gain | Long-term gain | |
|---|---|---|
| Holding period | One year or less, counted from the day after purchase. | More than one year. |
| Rate applied | Your ordinary rate, 22 percent in this example. | The long-term schedule, 15 percent in this example. |
| Tax on a \$15,000 gain | $3,300. | $2,250. |
| What sets the basis | Purchase price plus costs, the same for both. | Purchase price plus costs, the same for both. |
| Effect of extra income | Pushes the gain into higher ordinary bands. | Can push it from one long-term band to the next, a smaller step. |
| The planning lever | Waiting, where the position and the conviction allow it. | Which lots you sell, since basis differs across them. |
On this page
The gain is the same number in both cases
Proceeds of $40,000 against a basis of $25,000 is a $15,000 gain, and nothing about the holding period changes that. What changes is the schedule the $15,000 is dropped into. At 15 percent the bill is $2,250; at a 22 percent ordinary rate it is $3,300, and the difference is for a sale that happened on a different date.
Basis is the part people get wrong more often than the rate. Commissions, reinvested dividends and previous return-of-capital adjustments all move it, and a wrong basis produces a wrong gain at either rate. Capital gains tax sets out the identity, and the capital gains tax calculator runs it.
The clock is stricter than it sounds
Long-term means more than a year, not a year. The count starts the day after acquisition and the sale must fall after the anniversary, so a position bought on 3 March and sold on 3 March is short-term by one day. That single day is worth the whole 1,050 gap on this gain.
The rate a short-term gain meets is your marginal tax rate, which means it stacks on top of everything else you earned that year. A bonus, a second job or a large distribution can move a short-term gain into a higher band without the gain itself changing at all. The tax brackets calculator shows where the bands fall.
What the comparison is good for
It prices patience. The gap between $2,250 and $3,300 is what the holding period is worth on this trade, and that is a number worth knowing before selling rather than after. It is not a reason to hold a position you no longer want; a 22 percent rate on a gain still leaves more than a loss does. How investments are taxed covers dividends and interest alongside gains. This is educational material, not financial advice.
Worked examples
A \$15,000 gain at the 15 percent long-term rate
Shares bought for $25,000 are sold for $40,000 after two years, at a 15 percent long-term rate. What is the tax?
- The gain is proceeds minus basis: 40,000 minus 25,000 is $15,000.
- Apply 15 percent to the gain: $2,250.
The tax is $2,250 on a $15,000 gain, so most of the gain survives the sale.
The same sale eleven months in
Identical numbers, but the shares were held under a year and the ordinary rate is 22 percent. What is the tax now?
- Proceeds of $40,000 against a basis of $25,000 still leave a $15,000 gain, because the holding period touches neither figure.
- Apply the ordinary rate of 22 percent instead: $3,300.
The tax is $3,300. Selling before the anniversary cost more on an identical trade.
Common questions
Where does the one-year clock start?
The day after the purchase settles. The sale has to fall after the anniversary of that day to count as long-term.
Do losses follow the same split?
Yes. Short-term losses offset short-term gains first, and long-term against long-term, before the two are netted.
Do these rates apply inside a retirement account?
No. Gains inside tax-deferred accounts are not taxed on sale; the tax rules follow withdrawals instead.
Is this financial advice?
No. It is educational material about how a holding period changes the rate on a gain.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.