Buy an asset, sell it for more, and the profit is a capital gain. How much tax you pay on it can differ by more than double — and the deciding factor is almost absurdly simple: did you hold it for one year, or one year and a day?
What a capital gain is
A capital gain is the profit when you sell an asset — stocks, crypto, a property — for more than your cost basis (what you paid, plus certain adjustments). The gain is only 'realized,' and taxable, when you sell.
The one-year rule
| Holding period | Type | Taxed at |
|---|---|---|
| 1 year or less | Short-term | Ordinary income rates |
| More than 1 year | Long-term | Preferential 0/15/20% tiers |
Short-term gains are taxed like wages — potentially up to 37%. Long-term gains get a break.
Long-term rate tiers
Long-term capital gains fall into three brackets — 0%, 15%, or 20% — based on your taxable income. Many middle-income investors pay 15%; lower-income investors can pay 0% on some gains. High earners may also face an additional net investment income tax.
Offsetting gains with losses
Tax-loss harvesting lets you use investment losses to cancel out gains. If losses exceed gains, you can deduct a limited amount against ordinary income and carry the rest forward. Watch the wash-sale rule, which disallows a loss if you rebuy the same security within 30 days.
Frequently asked questions
How long do I have to hold to get the lower rate?
More than one year. Sell after holding 366+ days and the gain qualifies for the lower long-term capital gains rates.
Are capital gains taxed if I don't sell?
Generally no. Gains are 'unrealized' and untaxed until you sell. Selling is what triggers the taxable event.