Capital Gains: Short-Term vs. Long-Term
When you sell an investment at a profit, the gain is taxable. The tax rate depends on how long you held the asset. Short-term capital gains (held one year or less) are taxed as ordinary income — at your regular federal income tax bracket rate (10–37%). Long-term capital gains (held more than one year) are taxed at preferential rates: 0% for taxpayers in the 10–12% ordinary income bracket; 15% for most middle-income taxpayers (up to ~$492,000 for MFJ in 2024); 20% for high-income taxpayers. This rate differential creates a powerful incentive: by holding an investment just past the one-year mark, a taxpayer in the 22% bracket pays 15% instead of 22% on the gain — potentially saving thousands. Additional consideration: the Net Investment Income Tax (NIIT) applies an additional 3.8% on investment income (dividends, interest, capital gains) for taxpayers with MAGI above $200,000 (single) / $250,000 (MFJ). So the maximum federal rate on long-term gains for high earners is effectively 23.8% (20% + 3.8% NIIT) plus any state taxes. Capital losses can offset capital gains dollar-for-dollar — if you have $10,000 in gains and $6,000 in losses, only $4,000 is taxed. Up to $3,000 of net capital losses exceeding gains can be deducted against ordinary income annually; excess losses carry forward to future years.