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

What Are Capital Gains?

Capital gains are the profits you receive when you sell an asset. 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 may create a taxable gain.

Capital gains are taxed differently depending on whether they're classified as short- or long-term gains. 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

Short-term and long-term capital gains are differentiated by how long you've owned (or held) an asset. A capital gain is considered short-term if you've held the asset for a year or less. A long-term capital gain occurs when you've held the asset for more than a year.

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. Although the income levels used to determine long- and short-term capital gains tax rates are different, in general long-term rates are lower than short-term rates, making long-term capital 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, otherwise known as your 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.

Both short-term and long-term capital gains tax rates are adjusted annually for inflation. Here are the short-term capital gains tax rates for 2025:

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

In a few cases, long-term capital gains tax rates may exceed the standard 20% shown above. Here are a few examples:

• Capital gains from collectible items, such as antiques, jewelry or art, are taxed at a maximum rate of 28%.
• Gains from the sale of certain qualified small-business stock have a maximum tax rate of 28%.
• 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; $125,000 for married individuals filing separately and $250,000 for surviving spouses with dependent children.

What Are Capital Losses?

When you sell an investment for less than you paid for it, you have a capital loss you can use to offset capital gains. 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.

You can use capital losses to lower your tax bills 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.

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

How to Reduce Capital Gains Taxes

• Hold assets for at least a year. If you wait at least a year before you sell, you can pay the long-term capital gains tax rate, which is typically lower than your marginal tax rate.
• Harvest investment losses. You can offset capital gains by deliberately selling some of your investments at a loss. Tax loss harvesting is a common approach to managing capital gains taxes, but you may want to talk to an investment advisor before attempting to sell off investments at a loss.
• Minimize churn. The less often you sell, the fewer taxable gains you'll have. Some investors choose index funds because they typically do less buying and selling than more actively managed funds, thus reducing the capital gains they generate.
• Invest in tax-advantaged accounts. Traditional IRAs and 401(k)s let you defer paying taxes on capital gains; you don't pay taxes 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 to a qualified charity, you don't realize a gain—and you get a tax deduction for the amount of your donation.

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 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.

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) can 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 capital gains taxes going forward.