Short-term vs. long-term capital gains taxes, explained

If youve 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 difference 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 thats no fun).

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 financial markets, 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.

FYI: Since the Internal Revenue Service (IRS) views cryptocurrency and digital collectibles as property, any crypto-related gains are subject to capital gains taxes. Real estate home sales also fall under this category.

Table of Contents:

1. A quick review: what are capital gains taxes?
2. Short-term vs. long-term capital gains
3. Capital gains vs. capital losses
4. How can capital losses affect your taxes?
5. Calculating capital gains taxes
6. Example of calculating federal capital gains tax
7. Capital gains & state taxes
8. Advantages & disadvantages of long-term capital gains
9. Advantages & disadvantages of short-term capital gains
10. Things to keep in mind before selling your investments
11. Where to find your short- and long-term capital gains on the Public app
12. Bottom line
13. Where to find your short- and long-term capital gains on the Public app

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 holding period, or how long you hold a stock before selling.

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 1035% or more, depending on how much you make throughout the year.

On the other hand, you can sell an asset youve 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 020%.

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. Heres what the simple equation looks like:

The assets sale price Cost basis = Capital gain

Again, its not how much you earn that determines the type of capital gains you receive. Rather, its 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 may make short-term capital gains taxes worth it for many taxpayers that are involved in the stock market.

BUT THERES AN EXCEPTION:

Capital gains kept within an individual retirement account (IRA) are tax-deferred. As long as you dont withdraw any cash investments from your IRAinstead keeping the money in the account and potentially changing up your securitiesyoure in the clear. When you pay the taxes on your retirement savings depends on whether you use a traditional or a Roth IRA. A retirement accounts tax-advantaged status and an investors tax situation are key factors in deciding which account is best for you.

Capital gains vs. capital losses

Just as you can profit from the stock market, you can lose, too. Earning capital gains means youve sold your position at a higher rate than when you bought it. Its 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. Capital losses can score you tax deductions to a certain extent.

Hey, crypto investors:

You can dollar cost average your purchases of crypto on Public.com platform using the Recurring Investing feature.

This lets you automate investing weekly, biweekly, or monthly in your assets. Some investors may use it to help navigate volatile markets, manage risk, and build wealth over time. Keep tabs on the Public apprecurring investing is coming soon for stocks!

How can capital losses affect your taxes?

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. Heres 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 thatbut only up to a certain degree.
• Your net capital gain is the difference between your capital gains and losses.
• As of 2022, you can claim up to $3,000 in capital losses per year against your ordinary income. If youre 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 and financial advisors use their own tax-loss experts to help their clients maximize their returns.

Calculating capital gains taxes

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

Whether or not you take part in commission-free trading on Public, our calculator is accessible to you.. Well ask you a few questions like:

• Whats 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:

1. The length of time for each asset held, which helps you determine whether theyre 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, heres a chart for long-term capital gains tax rates for the 2022 tax year that you can refer to:

The IRS released their income tax brackets for the 2022 tax year. Investors can use this to calculate taxes on their short-term capital gains, since those are taxed at the same rate as your income:

• 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly this is the lowest rate)
• 12% for incomes over $10,276 ($20,551 for married couples filing jointly)
• 22% for incomes over $41,776 ($83,551 for married couples filing jointly)
• 24% for incomes over $89,076 ($178,151 for married couples filing jointly)
• 32% for incomes over $170,051 ($340,101 for married couples filing jointly)
• 35% for incomes over $215,951 ($431,901 for married couples filing jointly)
• 37% for incomes over $539,901 ($647,851 for married couples filing jointly)

Example of calculating federal capital gains tax

Say you sold a long-term position after five years of holding it. You sold the position at $5,000 (thats your market price). You bought the position for $2,000 (thats your cost basis). That makes your capital gains $3,000.

Since you held the position for more than a year, youre taxed on that $3,000 at the long-term rate of 0%, 15%, or 20% (as much as $600 for the highest bracket).

Now lets flip the script.

If you took that same $3,000 capital gain, but for a position you held for less than a year, youd be taxed at the short-term rate, aka your ordinary income rate of 0-35% (as much as $1,050 for the highest tax bracket).

Capital gains & state taxes

Most states tax capital gains at 2.913.3% on top of the federal capital gains tax rate.

Are there any states that dont tax capital gains?

Nine states do not have state capital gains taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming

Advantages & disadvantages of long-term capital gains

Did you know? The Public app offers a Long-Term Portfolio to help you lock investments in. It even gives you an overview of why you chose to invest in the first place!

Advantages & disadvantages of short-term capital gains

Things to keep in mind before selling your investments

• Check whether youve hit your price target.
• Analyze the companys financials.
• Compare with other investment opportunities.
• Take note of any recent or upcoming M&As.
• Consider how selling a stock will affect your tax bill.

Where to find your short- and long-term capital gains on the Public app

From your portfolio, select the position you want to look at. View All-Time Gain for your total capital gains (so far).

Open Total Holdings and view Invested for to see how long youve been invested.

Keep in mind you may have added to your investment over time. In this case, many traders use the First In, First Out (aka FIFO) method to calculate capital gains. Using FIFO, the first shares you sell are the first shares you bought.

Ready to invest? Public offers instant funding, so you can immediately deposit funds in your account and instantly invest in search of capital gains.

Bottom line

Itd be nice if your stock market returns were tax-free, but thats 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 investmentswith the IRS in mind. Whether youre taxed at 0% or 35%, knowing the details of calculating capital gains is key to getting the most out of your investments.

FAQs

Is it better to have short-term or long-term capital gains?

In many cases, its better to have long-term capital gains because theyre taxed at a lower rate. While short-term capital gains can eat into your tax return (or increase your tax bill), they can have their place when the gains are worth it.

What is the tax difference between short-term and long-term gains?

The difference between short-term and long-term capital gains lies in the tax rate investors must pay. Short-term capital gains are taxed at 1037% while long-term capital gains are taxed at 020%.

What is the maximum capital gains rate?

The maximum federal capital gains tax rate is 37%.

When do you have to pay taxes on your stock market profits?

Tax filers must pay stock market profits when they file their taxes.

What are the benefits to investing long-term?

Investing long-term with capital gains in mind may lower your tax burden on sale of an asset.

How can I minimize capital gains taxes?

Minimize capital gains taxes by holding investments for more than a year before selling. This brings you from higher short-term capital gains to lower long-term capital gains. Talk to a tax professional for tailored advice.