Capital gains taxes: short vs long term capital gains

If you’ve already indulged in our introduction to capital gains taxes, you may be wondering what the difference between short-term capital gains and long-term capital gains really is. Knowing the distinction between the two can help you optimize your stock market returns and minimize the amount of money you pay to the IRS each spring (because we all know that’s no fun).


  • Short-term capital gains are profits from assets you’ve held for a year or less.
  • Long-term capital gains are profits from assets you’ve held for more than a year.
  • The IRS taxes these two types of gains in different ways.
  • Capital losses can offset your gains in the eyes of the IRS.
  • Use our capital gains tax calculator to estimate how much you owe from your stock market profits.

A quick review: what are capital gains taxes?

You have to pay taxes on your capital gains, AKA any profits you receive from selling an asset. In terms of the stock market, these assets are stocks, bonds and fixed-income securities.

Now onto the two primary categories of capital gains that you can be taxed on: short- and long-term capital gains.

Related: An intro to capital gains taxes

Short-term vs long-term capital gains

Long-term and short-term capital gains each receive different treatment from the IRS. So what defines them?

The answer: The amount of time you hold them.

When you hold an asset for a year or less, then sell your securities for a profit, you earn short-term capital gains. In this instance, your return is taxed at the same rate as your ordinary income. Your rate could be anywhere from 10–35%, depending on how much you make throughout the year.

On the other hand, you can sell an asset you’ve held for more than a year. The money you earn from this transaction is called long-term capital gains. This means your return is taxed at a lower rate than your ordinary income. That rate could be anywhere from 0–20%.

You calculate both types of gains the same way. Take the market value you sold the asset at (if you profited, this is the higher rate). From this number, subtract your cost basis, or the price you initially paid for the position. Here’s what the simple equation looks like:

Market value the asset is sold at – Cost basis = Capital gain

Again, it’s not how much you earn that determines the type of capital gains you’ve received. Rather, it’s the amount of time you hold your assets before selling off.

Since long-term capital gains are taxed at a lower rate than your ordinary income, taxation on long-term investment profits is more favorable than taxation on your salary. However, high returns in swing periods make short-term capital gains taxes worth it for many investors.

BUT THERE’S AN EXCEPTION: Capital gains kept within an individual retirement account (IRA) are tax-deferred. As long as you don’t withdraw any cash investments from your IRA—instead keeping the money in the account and potentially changing up your securities—you’re in the clear. When you pay the taxes on your retirement savings depends on whether you use a traditional or a Roth IRA.

Capital gains vs capital losses

Just as you can profit from the stock market, you can lose, too. Earning capital gains means you’ve sold your position at a higher rate than when you bought it. It’s not the only outcome for your investments, as you likely know.

Capital losses occur when you sell your position at a lower rate than when you bought it, or below your cost basis.

We know that the government taxes capital gains. The cool thing about capital losses is they offset capital gains taxes, ultimately trimming the taxes you have to pay out. Here’s how it works:

  • If you want to take advantage of large short-term capital gains in the market without suffering from the income-level tax rates, you can use capital losses as a way to combat that—but only up to a certain degree.
  • Your net capital gain is the difference between your capital gains and losses.
  • As of 2020, you can claim up to $3,000 in capital losses per year. If you’re married filing separately, you can only claim up to $1,500 per year.

Oftentimes, individual investors will intentionally incur capital losses to offset their capital gains taxes. This practice is known as tax-loss harvesting. Robo advisors often have built-in tax-loss harvesting software, and online brokerages use their own tax-loss experts to help their clients maximize their returns.

Calculating capital gains taxes

You can use a capital gains calculator like ours to quickly figure out how much you’ll owe off your short- and long-term profits.

Whether or not you take part in commission-free trading on Public, our calculator complements stock market investments. We’ll ask you a few questions like: What’s the value of your purchase (AKA your cost basis), the sale value, length of ownership, state of residence, tax year, tax filing status and your taxable income? For a largely accurate estimate, you can use the calculator for all of your short-term gains, and then again for all of your long-term gains.

Calculating capital gains can be done manually, too. To calculate how much you owe for capital gains on any given asset, you need to collect three pieces of information:

  1. The length of time for each asset held, which helps you determine whether they’re short-term or long-term capital gains
  2. The net capital gain for each type of gain (long- or short-term), which is the difference between your capital losses and capital gains
  3. Your ordinary income tax rate, which depends on how much you made for the year and will affect the rate at which your short-term capital gains are taxed

As for what the capital gains percentage rates actually are, here’s a chart for long-term capital gains tax rates for the 2021 tax year that you can refer to:

Single Up to $40,400 $40,401 – $445,850 Over $445,850
Married filing jointly Up to $80,800 $80,801 – $501,600 Over $501,600
Married filing separately Up to $40,400 $40,401 – $250,800 Over $250,800
Head of household Up to $54,100 $54,101 – $473,750 Over $473,750

The IRS released their income tax brackets for the 2021 tax year, too. Investors can use this to calculate taxes on their short-term capital gains, since those are taxed at the same rate as your income.

  • 35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
  • 32% for incomes over $164,925 ($329,850 for married couples filing jointly);
  • 24% for incomes over $86,375 ($172,750 for married couples filing jointly);
  • 22% for incomes over $40,525 ($81,050 for married couples filing jointly);
  • 12% for incomes over $9,950 ($19,900 for married couples filing jointly).
  • The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).

The IRS says they’ve adjusted their 2021 income tax brackets for inflation. It seems they’ve actually eliminated the highest bracket of 37%, which affected people earning above $518,400 in 2020. Now, anyone earning more than $209,425 is lumped into the same category and is taxed at 35%.

WHEN YOU’RE READY TO FILE YOUR CAPITAL GAINS TAXES: Use IRS form 8949 to file your short-term gains. For long-term gains and any kind of capital losses, use IRS form 1040 schedule D.

Bottom line

It’d be nice to keep all of your market returns, but that’s just not the way it works in America. You have to pay taxes on your profits. Knowing the difference between short- and long-term capital gains can save you money, and it can help you become strategic about your investments—with the IRS in mind. Whether you’re taxed at 0% or 35%, knowing the details of calculating capital gains is key to getting the most out of your investments.

Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. She likes to give meaning to numbers by humanizing them. You can connect with her on Twitter at @writingsofrach.

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