US Capital Gains Tax: Short-Term, Long-Term and How to Plan

A capital gain arises when you sell an asset for more than its cost basis. The United States taxes those gains in two very different ways depending on how long you held the asset. Sell within a year and the gain is short-term, taxed at your ordinary income rate of up to 37 per cent. Hold for more than a year and the gain is long-term, taxed at 0, 15 or 20 per cent depending on your taxable income. For a high earner, the difference between day 364 and day 366 can be seventeen percentage points.

The long-term brackets are separate from the ordinary schedule and stack on top of your other income. A married couple with modest taxable income can realise a meaningful amount of long-term gain at 0 per cent — a fact that underpins the practice of gain harvesting in low-income years, such as an early retirement gap before pensions begin. Once income crosses the upper threshold, the 20 per cent rate applies, and a further 3.8 per cent net investment income tax applies above $200,000 single or $250,000 joint.

Cost basis is where most errors occur. Basis is what you paid plus commissions and certain adjustments, and it is reduced by returns of capital. Reinvested dividends increase basis, so treating them as free shares overstates your gain and your tax. Brokers report basis for most securities acquired after 2011, but inherited and gifted assets follow special rules: inherited assets generally receive a step-up to value at the date of death, while gifted assets carry the donor's basis.

Losses are useful. Capital losses offset capital gains dollar for dollar, and up to $3,000 of net loss can be deducted against ordinary income each year, with the remainder carried forward indefinitely. Tax loss harvesting — selling a depressed holding to realise the loss while staying invested through a similar but not identical asset — is one of the few reliable ways to reduce a tax bill without reducing wealth.

The wash sale rule constrains it. If you buy a substantially identical security within 30 days before or after the sale, the loss is disallowed and added to the basis of the replacement. The window is 61 days in total, it applies across your accounts including an IRA, and it catches automatic dividend reinvestment. Buying a different fund tracking a different index is the standard workaround; buying the same fund back on day 20 is not.

Selling a main home has its own generous relief. A single filer can exclude up to $250,000 of gain and a married couple up to $500,000, provided they owned and used the property as their main home for at least two of the five years before the sale. Partial relief exists for moves forced by work, health or unforeseen circumstances. Keep records of capital improvements, since they raise basis and can bring an above-threshold gain back under the limit.

Some assets sit outside the standard rates. Collectibles are taxed at up to 28 per cent. Real estate depreciation is recaptured at up to 25 per cent on sale, which surprises many landlords. Qualified small business stock can qualify for substantial exclusion under strict conditions. Cryptocurrency is treated as property, so every disposal — including swapping one token for another or spending it — is a taxable event requiring basis tracking.

Planning levers are mostly about timing and location. Hold appreciated assets past the one-year mark where you can. Place high-turnover strategies inside tax-advantaged accounts and buy-and-hold index funds in taxable ones. Realise gains in low-income years and losses in high-income ones. Donate appreciated shares to charity rather than cash, which secures a deduction without triggering the gain. And check the holding period before you click sell, because that one date is the most consequential entry on the whole trade.