Short-Term vs. Long-Term Capital Gains Tax on Stocks

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Short-term and long-term capital gains on stocks are taxed very differently, and the only thing that separates them is how long you owned the shares. If you sell stock you held for one year or less, the profit is a short-term capital gain. It is taxed as ordinary income at your regular federal bracket rate, which runs from 10% to 37%. If you held the shares for more than one year, the profit is a long-term capital gain. It is taxed at 0%, 15% or 20%, depending on your taxable income and filing status.

The same $10,000 profit can cost a middle-income investor $2,200 in federal tax as a short-term gain and $1,500 as a long-term gain. In some cases it can cost nothing.

How the Holding Period Works

For stocks you buy, the holding period begins on the day after the trade date and ends on the day you sell. The settlement date does not count. A gain is long-term only if you held the shares for more than one year. Holding for exactly one year is still short-term.

Here is an example. Suppose you buy shares on March 10, 2025:

A few rules catch stock investors off guard:

• Each purchase is its own lot. If you bought shares of the same company in January and again in September, each batch has its own holding period. Selling part of a position can produce a short-term gain on one lot and a long-term gain on another.
• Reinvested dividends create new lots. Every dividend reinvestment buys new shares with a fresh holding period. If you sell an entire position you have held for years, the most recent reinvested shares may still be short-term.
• Which shares you sell matters. Brokers generally default to first in, first out (FIFO), which sells your oldest shares first. Many brokers also let you choose specific lots at the time of sale. That choice changes both the size of the gain and whether it is short-term or long-term.
• Stock options and restricted stock have their own holding period rules. For shares received from employee equity awards, the clock usually starts when you acquire the shares, not when the grant was made.

A sale at a loss follows the same rule and creates either a short-term or a long-term capital loss.

Long-Term Capital Gains Tax Rates

Long-term gains on stock receive the preferential 0%, 15% and 20% rates. The income thresholds for these rates are set separately from the ordinary brackets and adjusted for inflation every year.

The thresholds below refer to taxable income, meaning income after the standard deduction or itemized deductions.

Long-term capital gains tax rates, tax year 2026

Long-term capital gains tax rates, tax year 2025

The 15% band is wide. A single filer can have more than half a million dollars of taxable income before any long-term gain is taxed at 20%. The 0% band means that a retiree, a student or anyone in a low-income year may be able to realize long-term gains without owing federal tax on them, as long as total taxable income stays under the threshold.

These rates also apply to qualified dividends. To count as qualified, a dividend generally has to come from a U.S. company or a qualifying foreign company, and you must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Dividends that fail the test are taxed as ordinary income, the same as short-term gains.

Short-Term Capital Gains Tax Rates

Short-term capital gains have no special rate schedule. They are added to your wages, interest, nonqualified dividends and other ordinary income, and the combined total is taxed under the regular federal brackets.

Federal ordinary income tax brackets (short-term gains), tax year 2026

Federal ordinary income tax brackets (short-term gains), tax year 2025

The system is progressive. Each rate applies only to the slice of income inside its band. For a single filer in 2025 with $100,000 of taxable income, the first $11,925 is taxed at 10%, the amount from $11,926 to $48,475 at 12%, and only the portion above $48,475 at 22%. Being “in the 22% bracket” describes the rate on your last dollars of income, not on all of it.

Because short-term gains sit in the same stack as your paycheck, a large short-term gain can spill into the next bracket. Only the part of the gain above the bracket line is taxed at the higher rate. The rate on your wages stays the same.

How the Two Types of Gain Are Stacked

The tax code orders income in a fixed sequence:

1. Ordinary income, including short-term gains, fills the brackets first.
2. Long-term gains and qualified dividends sit on top of that stack.
3. The 0%, 15% and 20% thresholds are measured against the position of each dollar of long-term gain in that stack.

This is why the long-term rate depends on your other income. Long-term gains never raise the tax rate on your ordinary income, because ordinary income is taxed first and is unaffected by what sits above it. Additional long-term gains can only move later dollars of gain from the 0% band into the 15% band, or from 15% into 20%.

Short-term gains work the other way. They raise ordinary income, which can push some of it into a higher bracket. They also push long-term gains higher in the stack, which can move those gains out of the 0% band.

Example 1: Same profit, two holding periods

Assumptions: single filer, tax year 2026, $60,000 of taxable ordinary income after deductions, and a $10,000 profit on a stock sale. Federal tax only.

Waiting past the one-year mark saves $700 on this gain. The gap grows in higher brackets. At the 35% ordinary rate, the same $10,000 short-term gain would cost $3,500, compared with $1,500 or $2,000 as a long-term gain, depending on where it falls in the stack.

Example 2: Using the 0% band

Assumptions: single filer, tax year 2026, $40,000 of taxable ordinary income, and a $15,000 stock gain.

If the gain is long-term:

• Room left in the 0% band: $49,450 minus $40,000 = $9,450, taxed at 0%
• Remaining gain: $15,000 minus $9,450 = $5,550, taxed at 15% = $832.50
• Total federal tax on the gain: $832.50

If the gain is short-term:

• $40,001 to $50,400 falls in the 12% bracket: $10,400 × 12% = $1,248
• $50,401 to $55,000 falls in the 22% bracket: $4,600 × 22% = $1,012
• Total federal tax on the gain: $2,260

As a short-term gain, the profit crosses a bracket line and the top $4,600 is taxed at 22%. As a long-term gain, almost two-thirds of it is taxed at zero.

Example 3: A married couple near a threshold

Assumptions: married filing jointly, tax year 2025, $100,000 of taxable ordinary income, and 100 shares bought at $20 and sold at $50, for a $3,000 gain.

• Long-term: the couple’s ordinary income is already above the $96,700 threshold for the 0% rate, so the gain is taxed at 15%, or $450.
• Short-term: total taxable income of $103,000 sits in the 22% bracket, which starts at $96,951 for joint filers in 2025, so the gain costs $660.

The $210 difference is modest in dollars. Measured against the profit, though, holding long-term keeps $2,550 of the $3,000 gain instead of $2,340.

Netting Gains and Losses

You are taxed on your net capital gain for the year, not on each sale separately. The netting runs in a fixed order:

1. Short-term losses offset short-term gains, giving a net short-term result.
2. Long-term losses offset long-term gains, giving a net long-term result.
3. If one result is a gain and the other a loss, they offset each other.
4. Whatever remains keeps its character. A net short-term gain is taxed at ordinary rates, and a net long-term gain at 0%, 15% or 20%.

If you end the year with a net capital loss, you can deduct up to $3,000 of it against ordinary income ($1,500 if married filing separately). Any loss beyond that carries forward to future years with no expiration, and it keeps its short-term or long-term character when it does.

Here is an example:

The $4,000 long-term loss absorbs most of the short-term gain, and the remaining $1,000 is taxed as ordinary income. This ordering is the basis of tax-loss harvesting: selling losing positions to offset gains. A loss that offsets a short-term gain avoids tax at ordinary rates, so it is worth more than a loss that offsets a long-term gain taxed at 15%.

The wash sale rule limits this strategy. If you sell stock at a loss and buy substantially identical stock within 30 days before or after the sale, you cannot claim the loss at that time. The disallowed loss is added to the basis of the replacement shares instead. The holding period of the shares you sold also carries over to the new ones, which can turn what looks like a fresh purchase into a long-term holding sooner than expected.

Special Cases for Stock Investors

Inherited stock

Stock you inherit is treated as long-term no matter how long you or the deceased owned it. The basis is generally reset to the fair market value on the date of death (a “stepped-up” basis). If you inherit shares and sell them a week later, any gain is long-term and is usually small, because the basis was reset so recently.

Gifted stock

When you receive stock as a gift, you generally take over the donor’s basis and the donor’s holding period. If your parent bought shares five years ago and gives them to you, a sale next month produces a long-term gain measured from your parent’s original cost. A special rule applies when the stock is worth less than the donor’s basis at the time of the gift. In that case, a different basis is used to calculate a loss.

Mutual funds and ETFs

Funds pass realized gains through to shareholders as capital gain distributions. These distributions are taxed as long-term gains regardless of how long you have owned the fund, because the character depends on the fund’s holding period, not yours. Short-term gains realized inside a fund are generally paid out as ordinary dividends instead. When you sell the fund shares themselves, your own holding period applies.

Retirement accounts

Trades inside a traditional IRA, Roth IRA or 401(k) do not create capital gains at the time of the trade, so the short-term versus long-term distinction does not apply inside these accounts. Withdrawals from traditional accounts are taxed as ordinary income regardless of how long the investments were held. Qualified Roth withdrawals are tax-free.

Qualified small business stock

Under Section 1202, noncorporate investors can exclude some or all of the gain on qualified small business (QSB) stock acquired at original issue after August 10, 1993, and held for at least five years. Under the long-standing rules:

• A QSB is a domestic C corporation whose aggregate gross assets, meaning cash plus the adjusted basis of its other property, have not exceeded $50 million since August 10, 1993, and that files the required reports. Technology, retail, wholesale and manufacturing businesses can qualify. Hospitality, personal services, financial services, farming and mining businesses cannot.
• The exclusion is 100% for stock acquired after September 27, 2010. It was 50% originally and 75% for stock acquired from February 17, 2009, through September 27, 2010.
• The eligible gain is capped at the greater of $10 million or 10 times the adjusted basis of the stock.

Congress has revised these terms for more recently issued stock, so the exclusion that applies depends on when the shares were issued.

Assets Taxed at Other Rates

The 0%, 15% and 20% schedule covers stocks, bonds and most other investment property. Collectibles are the main exception.

Collectibles

Long-term gains on art, antiques, jewelry, precious metals, coins, stamps and other collectibles are taxed at a maximum rate of 28%. If your ordinary bracket is lower than 28%, the lower rate applies. This rule also reaches some exchange-traded products that hold physical precious metals, which is one way stock market investors can end up with collectibles treatment. Short-term gains on collectibles are taxed as ordinary income, like any other short-term gain.

The Net Investment Income Tax

Higher earners can owe an additional 3.8% net investment income tax (NIIT) on capital gains, both short-term and long-term, as well as on dividends, interest and other investment income. It applies to the smaller of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds these thresholds:

These thresholds are set in the statute and are not adjusted for inflation. With the NIIT, the top federal rate on long-term gains is effectively 23.8%, and the top rate on short-term gains is effectively 40.8%.

The NIIT also matters for the bracket question. A long-term gain does not raise the rate on your wages, but it does raise your MAGI, and even a gain taxed at 0% is still reported and counts toward your adjusted gross income. That can bring the NIIT into play, increase the taxable portion of Social Security benefits, affect premium tax credits for marketplace health insurance and state income tax, or reduce deductions and credits that phase out with income.

Capital Gains and State Taxes

Federal tax is only part of the bill. Most states with an income tax treat capital gains as ordinary income and do not offer a separate long-term rate. A state tax can therefore add several percentage points to both kinds of gain without changing the gap between them.

States with no tax on capital gains include:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Wyoming

Washington has no tax on wage income but levies a separate tax on long-term capital gains above an annual exemption. A few other states soften the tax with a targeted break. Colorado offers an exclusion for certain gains on real or tangible property, New Mexico allows a deduction for part of federally taxable gains, and Montana provides a credit that offsets part of the tax.

How to Calculate the Gain on a Stock Sale

1. Find your cost basis. This is the price you paid for the shares plus commissions and other purchase costs. Adjust it for events such as stock splits, return-of-capital distributions, wash sale disallowances and reinvested dividends. Each reinvested dividend adds a new lot with its own basis.
2. Find your amount realized. This is the sale price minus commissions or fees on the sale.
3. Subtract basis from the amount realized. A positive result is a capital gain. A negative result is a capital loss.
4. Classify each lot as short-term or long-term using the holding period rules above.

Here is an example. You buy 50 shares at $80 with a $5 commission, for a basis of $4,005. You sell them at $120 with a $5 commission, for an amount realized of $5,995. The gain is $1,990, and whether it is short-term or long-term depends only on the dates.

For shares bought in recent years, brokers report the basis to the IRS on Form 1099-B. For older shares, shares moved between brokers or shares received as gifts, the basis may be missing or marked “noncovered.” In that case you are responsible for documenting it.

Reporting and Paying the Tax

Individual sales are listed on Form 8949, separated into short-term and long-term transactions. The totals flow to Schedule D, and the net result carries to Form 1040, where the preferential rates on long-term gains are applied through the tax computation worksheet. The tax is due with your federal return, normally in April of the following year.

Brokers do not withhold income tax from stock sales. If you realize a large gain, especially a short-term one, you may need to make quarterly estimated tax payments to avoid an underpayment penalty. You can also raise withholding from your paycheck to cover the extra tax, since withholding is treated as paid evenly throughout the year.

Do the Rates and Thresholds Change?

The rates (0%, 15% and 20% for long-term gains, and 10% through 37% for ordinary income) change only when Congress passes new legislation. The income thresholds change every year, because the IRS adjusts them for inflation. This is why the 2026 tables above differ from the 2025 tables.

The yearly adjustment has a practical effect. If your income stays flat while the thresholds rise, more of your long-term gain can fall into a lower band. A sale timed for early January rather than late December lands in the next tax year, under that year’s thresholds, and the tax on it is due a year later. The NIIT thresholds are the exception, since they are fixed and do not move with inflation.

FAQs

The Bottom Line

Anyone selling stock in a taxable account should check the purchase date of each lot before placing the trade. Holding shares for more than one year moves the profit from ordinary income rates of up to 37% to long-term rates of 0%, 15% or 20%, and in lower-income years part or all of the gain may owe no federal tax. Planning sales, lot selection and loss harvesting around these rules can keep more of each gain.