Understanding Short‑Term vs Long‑Term Capital Gains

One of the most confusing things for tax purposes can be when you go to sell something. Some examples could be stocks, crypto, or real estate. The amount of time you hold it means a difference in how it gets taxed. If you hold for one year or less, it’’s a short‑term capital gain. If you hold it longer than 12 months, it becomes a long‑term gain. That little difference in time can equal a big difference in taxes. Let’s break it down a little further to help you understand if it makes sense to sell or hold your investments.

Breaking Down Short Term Capital Gains

What exactly is a short term capital gain? This means you sell something within a year. The IRS can treat this just like a regular paycheck. It gets taxed at ordinary income tax rates, which in 2025 range roughly from 10 percent to 37 percent depending on your taxable income and filing status. (i.e single or married filed separately or jointly). The bad news for this type of capital gain is there aren’t really any breaks with it. If you’re in the 24 percent bracket, guess what you’ll owe on that gain? About 24 percent of it.  Naturally tax brackets are tiered in structure, so the entire amount might not be subject to your tax bracket, but understanding your short term capital gains are taxed like ordinary income is a good rule of thumb.   

What Are Long Term Capital Gains? 

Let’s say you hold that investment for more than a year. That’s when the long‑term capital gains tax rates apply. The rates now become more favorable. In 2025, those rates are at 0 percent, 15 percent, or 20 percent, depending on your taxable income and how you file (single, married, head of household, etc.). If your taxable income is low enough, you might even qualify for the 0% long-term rate, letting you keep every penny of your gain. By holding longer, you’re also giving your investment more time to grow. In short, the tax code rewards patient investors with lighter tax bills and better long-term results.

Differences Between Short-Term and Long-Term Capital Gains

When looking at short-term versus long-term capital gains, here’s a clear way to understand the differences for tax payers.

• Holding period- Short‑term gains occur when you sell an asset held for one year or less, while long‑term gains kick in after you’ve held an asset for more than a year 
• Tax rate- Short‑term gains are taxed as ordinary income, which could be anywhere from 10% to 37% depending on your tax bracket. Long‑term gains enjoy preferential rates(0%, 15%, or 20%), based on your taxable income and filing status
  
• Special asset types- Certain long‑term assets get taxed at unique rates: collectibles may be taxed up to 28%, and portions of gains from real estate depreciation can face a 25% rate.

Why does it matter? Here’s the thing. That 12‑month mark can make a real difference. Imagine making a $10,000 gain. If it’s short‑term and you’re in a high bracket, you could owe thousands more than if it’s long‑term. That extra patience could mean you end up paying significantly less in taxes. In some cases, that means just waiting a few more weeks.

5 Smart Strategies To Reduce Your Tax Liability 

1. Hold for at least 12 months if possible. If you hold your investment for longer than a year, you’re potentially getting thousands back in return.
2. Consider your income.   If you expect lower income in a future year (like retirement), selling then might let you qualify for 0 percent long term rates.
3. Harvest losses- Selling underperforming investments to offset gains( tax‑loss harvesting) helps reduce net taxable gain.
4. Use tax‑advantaged accounts if possible. In IRAs, 401(k)s, HSAs or Roth accounts, gains aren’t taxed while inside. Withdrawals are taxed later (or tax‑free in the case of Roths)
5. Pick cost basis methods wisely. Specific identification lets you sell high‑basis lots first, potentially lowering gains. Other methods like FIFO or average cost basis may not save as much

Why the IRS Distinguishes Short-Term and Long-Term Gains

The IRS draws a line between short‑term and long‑term capital gains for a simple reason. It wants to encourage longer-term investing. As we discussed earlier, you can get a much more favorable tax rate by holding an investment for a longer period of time. That design isn’t accidental. The tax system rewards patience, nudging people toward investment strategies that promote stability and long-term growth, rather than quick flips. The one time that might make sense to sell short is you had an unmet personal need. For example, let’s say you needed the money for an unexpected medical expense or family emergency. Occasionally tapping short‑term gains for emergency funds makes sense, even if it means paying the ordinary income rate.

Common Investor Mistakes with Capital Gains

Investing can be rewarding, but it’s easy to make costly mistakes when it comes to capital gains. Let’s explore some common pitfalls and how to steer clear of them.

Selling Too Soon

It’s tempting to cash out when a stock’s price rises, but selling before holding an asset for at least a year means you’ll face higher short-term capital gains taxes.

Tip: Before selling, evaluate whether the potential tax savings from holding longer outweigh the immediate gains from selling now.

Forgetting to Track Holding Periods

Your holding period determines whether your gains are short-term or long-term. If you don’t track when you bought and sold an asset, you might misclassify your gains, leading to higher taxes.

Tip: Keep detailed records of all your transactions, including purchase and sale dates, to accurately determine your holding periods.

Ignoring the Wash-Sale Rule

The wash-sale rule disallows a tax deduction for a loss if you buy a substantially identical security within 30 days before or after the sale. This means you can’t sell a stock at a loss and then quickly repurchase it to claim the deduction.

Tip: Wait at least 31 days before repurchasing the same or a substantially identical security to avoid triggering the wash-sale rule.

Miscalculating Cost Basis

Your cost basis is what you paid for an asset, plus any adjustments like commissions or reinvested dividends. If you don’t calculate it correctly, you might overstate your gains and pay more in taxes.

Tip: Use the “specific identification” method to sell the highest-cost lots first, reducing your taxable gains. Keep thorough records of all transactions and consult with a tax professional if needed.

Wrapping It Up: Plan Smart, Pay Less

When it comes to capital gains, patience really can be profitable. Holding for more than a year, timing your sales during low‑income years, using losses strategically, or investing inside tax‑advantaged accounts can all add up to more money in your pocket. If sorting out all this feels overwhelming or you just want a professional touch, consider talking with The Flexkeeper. We’re a professional firm offering remote and local tax preparation services nationally to help our clients get the most out of their investments. Our team stays current on the latest IRS rules and thresholds to make sure your return is accurate, timely, and optimized. Whether you’re an individual investor or a business owner, we’re here to help.

Ready to Get Help?

If tax planning around capital gains feels like too much math or too many confusions, get in touch with us today. We’ll help you strategize around those holding periods, choose the right timing, and make the most of deductions. Contact us today to learn more!