Capital Gains: Short-Term vs. Long-Term

The holding period

An asset held for one year or less produces a short-term gain, taxed at ordinary income rates. An asset held for more than one year produces a long-term gain, taxed at preferential rates of 0%, 15%, or 20%, depending on income.

Certain gains can be taxed differently, such as collectibles and part of the gain on depreciated real estate.

Reporting

Sales are usually listed on Form 8949 and summarized on Schedule D. Brokers report proceeds and often basis on Form 1099-B, but the taxpayer should confirm basis is correct.

Losses

Capital losses first offset capital gains. Up to $3,000 of net capital loss a year ($1,500 if married filing separately) can offset other income. Any remaining loss carries forward indefinitely.

A loss on the sale of personal-use property, such as a family car, is generally not deductible.

How holding periods are counted

The holding period generally starts the day after purchase and includes the day of sale. Shares bought on March 10 need to be sold on or after March 11 of the next year to be long-term. Inherited property is automatically treated as long-term. Gifted property generally takes on the donor's basis and holding period, with special rules if the value is below basis.

How gains and losses are netted

Short-term gains and losses are netted together, and long-term gains and losses are netted together. If the two results have opposite signs, they are netted against each other.

For example, an investor has a $10,000 short-term gain, a $4,000 short-term loss, a $15,000 long-term gain, and a $20,000 long-term loss. The short-term net is a $6,000 gain and the long-term net is a $5,000 loss. The final result is a $1,000 net short-term gain, taxed at ordinary rates.

Rates beyond 0%, 15%, and 20%

The 0%, 15%, and 20% brackets depend on taxable income and filing status, and thresholds change annually. Other rates can apply. Unrecaptured Section 1250 gain on depreciated real estate is taxed at up to 25%, and gains on collectibles at up to 28%.

Higher-income taxpayers may also owe the 3.8% net investment income tax under Section 1411. The combined federal rate on a long-term gain can therefore reach 23.8%, before state tax. Most states tax capital gains, often at ordinary rates.

Basis: the often-missed number

Gain is the amount realized minus basis, so basis errors change the tax. Basis generally starts with cost and includes commissions. Reinvested dividends add to basis, and missing them can result in paying tax twice on the same money. Stock splits change the per-share basis but not the total.

Taxpayers holding multiple lots can often select which shares to sell through specific identification, if they tell the broker at the time of the sale. Selling higher-basis lots can reduce the current gain.

Digital assets and planning

The IRS treats digital assets as property, so selling or swapping crypto generally creates a capital gain or loss. Brokers are phasing in reporting on Form 1099-DA, and taxpayers should keep their own transaction history.

Common planning includes holding for more than a year, realizing losses before year-end to offset gains, and donating appreciated stock held long-term to charity, which can avoid the gain and may provide a deduction.

A preparer's checklist

Start with every Form 1099-B, Form 1099-DA, and Form 1099-S, and confirm that the proceeds reconcile to the return. Check whether basis was reported to the IRS, and find it yourself where it was not. Look for wash sale adjustments, sales across several accounts, and any corporate actions.

Confirm the holding period for each lot, and check whether inherited or gifted property needs a different basis. Identify any sale of a home, rental, or business asset, because those follow different forms and rules.

Bring forward capital loss carryovers from the prior year, then complete the netting on Schedule D. Finally, check the 0%, 15%, and 20% brackets, the net investment income tax, and the state treatment.

Frequently asked questions