Short-Term vs. Long-Term Capital Gains Tax: What’s the Difference?

What Are Capital Gains?

Capital gains are the profits you generate when you sell an asset for more than you paid for it. Taxable assets include investments like:

• Stocks and mutual funds
• Cryptocurrency
• Businesses
• Cars
• Art
• Antiques
• Precious metals
• Real estate

When you sell any of these items at a profit, you create a taxable capital gain.

Capital gains are taxed differently depending on how long you own the asset before selling it. Short-term capital gains are taxed as regular income, at the same rates as your salary or bank interest. Long-term capital gains are taxed at special capital gains tax rates, which are generally lower than regular tax rates.

Short-Term vs. Long-Term Capital Gains Tax

A capital gain is considered short-term if you've held an asset for a year or less. A capital gain is long-term when you've held the asset for more than a year before selling.

Short-term capital gains are taxed at the same marginal income tax rates as your regular income, ranging from 10% to 37%, depending on your total taxable income. Long-term capital gains are taxed at 0%,15% or 20%, also depending on your income level. In general, long-term capital gains rates are lower than short-term rates, making long-term gains more tax-efficient than their short-term counterparts.

Short-Term Capital Gains Tax Rates for 2025

Short-term capital gains are taxed at your top marginal tax rate, or tax bracket. To find this rate, estimate your taxable income (wages plus interest and investment gains) and find your income bracket in the table below.

Source: IRS

Long-Term Capital Gains Tax Rates for 2025

Long-term capital gains are taxed at specific capital gains tax rates. Depending on your taxable income, the difference between short- and long-term rates can be significant.

Example: If your adjusted gross income is $120,000, your short-term rate is 24% while your long-term rate is 15%. On a $10,000 gain, that's a $900 tax difference.

Here are the long-term capital gains tax rates for 2025:

Source: IRS

Special Capital Gains Tax Rates

Some long-term capital gains are taxed at special rates. Here are a few examples:

• Collectibles: Capital gains from collectible items, such as antiques, jewelry and art, are taxed at a maximum rate of 28%.
• Small business stock: Gains from the sale of certain qualified small business stock have a maximum tax rate of 28%.
• Depreciated property: A portion of the gains from selling property where depreciation was claimed may be taxable at a maximum rate of 25%.

Net Investment Income Tax

An additional 3.8% tax on investment income may apply if your modified adjusted gross income is greater than $200,000 for singles or heads of household; $250,000 for married couples filing jointly; or $125,000 for married individuals filing separately.

Short-Term Capital Gains Tax Rates for 2026

Both short-term and long-term capital gains tax rates are adjusted annually for inflation.The IRS increases income targets used to set short-term (and long-term) capital gains rates. Here are the short-term capital gains tax rates for 2026:

Source: IRS

Long-Term Capital Gains Tax Rates for 2026

Income levels associated with long-term capital gains rates are adjusted annually as well. Here are the long-term capital gains tax rates for 2026.

Source: IRS

What Are Capital Losses?

When you sell an investment for less than you paid for it, you have a capital loss. You can use capital losses to lower your tax bill in three ways:

• Offset capital gains. Subtract capital losses from your taxable capital gains without limit. If you have $1 million in gains and $1 million in losses, you can use both to zero each other out.
• Reduce your regular income. If you've used all your capital losses to wipe out your capital gains, you can apply up to $3,000 in capital losses to reduce your income each year, or $1,500 if you're married filing separately.
• Carry over losses to future years. You can carry over any additional losses to offset income in future years, but the same limits apply: You can use any amount of losses to offset capital gains but only $3,000 to offset regular income.

Use Schedule D on IRS Form 1040 to calculate your net short- and long-term gains and losses. Your investment firm will send you Form 1099-B or 1099-S, summarizing your gains and losses for the year, to make this process easier.

Tip: Capital losses from the sale of personal-use property like your home or car are not tax deductible.

How to Reduce Capital Gains Taxes

You may not be able to eliminate capital gains taxes entirely, but you can reduce your tax exposure with a few strategic moves.

• Hold assets for at least a year. Waiting at least a year before you sell allows you to use the lower long-term capital gains tax rate.
• Harvest investment losses. Offset capital gains by deliberately selling some of your investments at a loss. Tax-loss harvesting is a common way to manage capital gains taxes, but you may want to talk to an investment advisor before taking losses.
• Minimize turnover. The less often you sell, the fewer taxable gains you'll have. This is one strategy behind investing in index funds, since they typically do less buying and selling than actively managed funds.
• Invest in tax-advantaged accounts. Traditional IRAs and 401(k)s let you defer paying taxes on capital gains; you don't pay taxes on gains until you withdraw money from your account. Gains in Roth IRAs, 529 educational savings plans and health savings accounts are tax-free as long as you make qualified withdrawals.
• Donate shares to charity. When you donate shares of stock or other assets directly to a qualified charity, you don't realize a gain. Better still, you get a tax deduction for the full amount of your donation. IRS rules and limitations can be complicated, so you may want to consult a tax pro.

Tip: If you live in your home for at least two of the five years prior to selling it, you may be able to exclude up to $250,000 in capital gains as a single or head of household filer, or $500,000 if married filing jointly. Learn more about what happens when you sell your home before two years are up.

Frequently Asked Questions

The Bottom Line

Both long-term and short-term capital gains are taxable in the year they're earned. If you've made money in investments or by selling your home or business this year, be prepared to document your gain and pay taxes on it when you file your tax return next spring.

Because capital gains taxes can be complex, working with an investment advisor or tax advisor (or both) might be helpful. A trusted advisor can help you understand your capital gains and losses, prepare and pay your taxes, and create a tax strategy that minimizes both long- and short-term capital gains taxes going forward.