Short-term vs. Long-term capital gains taxes

Understanding capital gains taxes can make a meaningful difference in your investment returns, especially when it comes to distinguishing between short- and long-term capital gains. In the U.S, the IRS taxes capital gains differently depending on how long you’ve owned the asset before selling it. 

Knowing these differences helps you understand which federal rate schedule may apply when you sell an asset. This guide summarizes how the IRS treats short-term vs. long-term capital gains and lists the 2025 and 2026 federal thresholds.

What are capital gains taxes?

Capital gains taxes are the taxes you owe on profits from selling certain types of investments or assets. When you sell an asset, such as stocks, real estate, or other investments, for a higher price than what you initially paid, the profit you make is considered a capital gain. This gain is treated as a form of income, and the IRS requires you to pay taxes on it.

Now, let’s move on to the two primary categories of capital gains that you can be taxed on: short- and long-term capital gains.

FYI: The IRS generally treats digital assets (including cryptocurrency and NFTs) as property, so gains and losses may be subject to capital gains rules. Home sale gains can also be capital gains, although some taxpayers may qualify to exclude part of the gain if IRS requirements are met.

What are short-term capital gains​?

Short-term capital gains apply to assets you’ve held for one year or less before selling. These gains are taxed at the same rate as your ordinary income, which can be anywhere from 10% to 37%, depending on your tax bracket. This means that if you buy a stock and sell it within a few months for a profit, those earnings will be taxed like your paycheck or any other regular income.

For instance, if you’re in a high-income bracket, say 35%, then your short-term capital gains from selling stocks or other assets within a year will also be taxed at that rate. So, for every $1,000 in short-term gains, you could owe up to $350 in federal taxes.

Here’s a table for the 2025 tax brackets ordinary income tax rates based on filing status, useful for understanding short-term capital gains tax rates, as these are taxed at ordinary income rates:

Now, let’s break down the 2026 Federal income tax brackets based on filing status, which will help in understanding how your short-term capital gains might be taxed:

For instance, if you are single and your taxable income is $55,000 (including short‑term gains), part of it falls in the 22% bracket, so the portion of your short‑term gains that lies above $50,400 would be taxed at 22%, with the rest taxed at the lower 10% and 12% rates.

What are long-term capital gains?

Long-term capital gains are taxed differently. These gains apply when you’ve held onto an asset for more than a year before selling.

The IRS taxes most long-term capital gains using the 0%, 15%, or 20% rate structure, depending on your taxable income and filing status. 

Depending on your taxable income, a long-term capital gain may fall into the 0%, 15%, or 20% rate ranges, while short-term gains are generally taxed at ordinary income tax rates.

Let’s say you made a $5,000 profit from selling a stock you held for over a year. If your taxable income places that gain in the 15% long-term capital gains range, you would owe $750 in federal taxes on that gain. If the same gain were short-term, it would generally be taxed at ordinary income tax rates—and could be taxed as high as 37% at the top marginal rate, which would amount to $1,850 on the same $5,000 gain.

Some capital gains can be taxed under different federal rules, and a 3.8% Net Investment Income Tax may also apply for certain taxpayers.

Here’s a table for the 2025 long-term capital gains tax rates (based on taxable income), which apply to gains on assets held for more than one year. These rates are generally lower than ordinary income tax rates:

Note: Based on the 2025 tax year thresholds.

For the 2026 tax year, here are the federal long-term capital gains tax brackets (for most long-term capital gains and qualified dividends), based on taxable income and filing status.

These thresholds are inflation-adjusted and are often lower than ordinary income tax rates that apply to short-term gains, so long-term capital gains may be taxed at lower federal rates than short-term gains, depending on your taxable income. State tax treatment varies: some states tax capital gains as part of state taxable income, and a few have additional capital-gains–related taxes, which can increase total tax owed.

Note: Based on the 2026 federal long-term capital gains thresholds.

Short-term vs. Long-term capital gains

Understanding the key differences between short-term and long-term capital gains can help you plan your investment strategy and minimize taxes. Here’s a quick comparison to clarify how these two types of gains are taxed and how they can impact your overall returns:

How to calculate capital gains tax?

Check out the Public.com capital gains calculator to quickly figure out how much you’ll owe off your short- and long-term profits.

Our calculator is available to you, regardless of whether you participate in commission-free trading on Public. We’ll simply ask a few questions, such as:

• 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?

Quick Tip: To get a more accurate estimate, use the calculator for all of your short-term gains and then again for all of your long-term gains.

Did you know? 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:

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

Example of calculating federal capital gains tax

Learn how the federal capital gains tax is applied with these simple examples, making it easier to understand what you might owe when selling investments.

Scenario 1: Long-term capital gains tax

Imagine you bought an investment for $2,000 and held it for five years. After selling it for $5,000, your capital gain is:

$5,000 (sale price) – $2,000 (purchase price) = $3,000 (capital gain).

Because you held the investment for more than one year, it’s generally treated as a long-term capital gain. For most assets, long-term capital gains are taxed at 0%, 15%, or 20%, depending on your taxable income. At the 20% rate, the federal tax on a $3,000 gain would be $600.

Scenario 2: Short-term capital gains tax

Now, let’s say you sold the same investment after holding it for less than a year. This would be classified as a short-term capital gain. Short-term gains are taxed at your ordinary income tax rate, which can range from 10% to 37%, depending on your taxable income.. At the highest bracket, you’d owe up to $1,110 in taxes on the $3,000 gain.

Holding investments for over a year can significantly lower your tax bill due to the reduced tax rates on long-term capital gains.

Strategies to manage capital gains taxes

Here’s how you can minimize your tax burden:

1. Hold investments for more than a year:  Long-term investments often lead to significant tax savings compared to short-term trades.
2. Harvest tax losses: If you have investments that lost value, you can sell them to offset your gains. This is known as tax-loss harvesting.
3. Contribute to tax-advantaged accounts: Using accounts like IRAs or 401(k)s can help you defer or avoid capital gains taxes.
4. Watch out for the wash-sale rule: If you sell a stock at a loss and repurchase it within 30 days, the IRS disallows the loss deduction.

The bottom line

Understanding capital gains taxes is an important part of making informed investment decisions and keeping more of your returns. Public.com offers tools and resources to help you stay on top of your investments and manage your tax obligations. Whether you’re trading stocks, ETFs, or crypto, Public makes it easier to track your investments and stay organized.

It takes just two minutes to join Public and start investing with confidence. Transfer your existing portfolio or build a new one with tools designed to support your financial goals. Start your journey with Public today and take charge of your financial future.