Capital Gains Tax
Sell an investment you’ve held eight months, and sell one you’ve held fourteen months, for the identical profit — the IRS taxes them completely differently.
What Is It
Capital gains are the profit from selling an investment for more than you paid for it. Short-term gains — on anything held one year or less — are taxed as ordinary income, at your regular tax bracket. Long-term gains — on anything held more than one year — get preferential rates instead: 0%, 15%, or 20%, depending on your income. The gain only becomes taxable when you actually sell — an investment can grow in value for years, untaxed, as long as you keep holding it.
Why It Matters
The one-year holding period is a hard line, not a guideline — selling a day early can mean paying your full ordinary rate instead of the long-term rate. For 2026, the long-term capital gains brackets are:
- 0%: Single $0–$49,450 / Married Filing Jointly $0–$98,900
- 15%: Single $49,451–$545,500 / Married Filing Jointly $98,901–$613,700
- 20%: Single over $545,500 / Married Filing Jointly over $613,700
High earners may also owe an additional 3.8% Net Investment Income Tax (NIIT) on top of the long-term rate — a separate, more complex tax with its own thresholds, worth knowing exists even without going deep into it here. This also connects directly to tax loss harvesting: realized losses offset realized gains, which is exactly why the two concepts sit side by side. Knowing your holding period before you sell — not after — is what actually lets you use that connection on purpose, instead of discovering the rate difference on your tax return.
Quick Example
Someone in the 22% ordinary tax bracket sells a long-term holding for a $10,000 gain. At the long-term rate — 15%, since this falls in that bracket — tax owed is $1,500. Had it been a short-term gain instead, taxed at their ordinary 22% rate, tax owed would be $2,200 — a $700 difference in tax on the exact same $10,000 profit, from the holding period alone.
Run your own numbers: