{"id":23016,"date":"2026-01-23T04:58:05","date_gmt":"2026-01-23T04:58:05","guid":{"rendered":"https:\/\/budgetadirect.com\/?p=23016"},"modified":"2026-01-23T04:58:07","modified_gmt":"2026-01-23T04:58:07","slug":"short-term-vs-long-term-capital-gains-how-they-work","status":"publish","type":"post","link":"https:\/\/budgetadirect.com\/?p=23016","title":{"rendered":"Short-Term vs. Long-Term Capital Gains: How They Work"},"content":{"rendered":"
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Capital gains are the profit you earn when you sell an asset like a home, business or stocks. Those gains are subject to capital-gains taxes, but capital gains are taxed differently depending on the type of asset \u00a0\u2014 and how long you owned the asset. That\u2019s because, while the federal government encourages Americans to invest, Uncle Sam also nudges people to think long term when it comes to investing.<\/p>\n

Here\u2019s how the government encourages investors to buy and hold: While the amount of capital-gains tax you\u2019ll owe on profitable investments will depend on your taxable income and filing status, how long you owned that asset is actually the bigger differentiator in how much tax you\u2019ll pay on capital gains. For many types of assets, if you sell less than a year after you made the purchase, you\u2019re going to pay more in taxes than if you\u2019d held that asset for more than a year.<\/p>\n

To maximize your profit, it\u2019s important to be mindful of the different rates you\u2019ll pay for short-term vs. long-term capital gains. Gains on investments that you\u2019ve owned for one year or less, known as short-term capital gains, are taxed at the same rate as ordinary income. Gains on assets you\u2019ve owned for longer than a year, aka long-term capital gains, are typically taxed at a much lower rate, or even not taxed at all, depending on your income and filing status.<\/p>\n

What is a capital gain?<\/h2>\n

A capital gain is typically calculated in a fairly straightforward manner: It\u2019s the difference between the amount you sold an asset for versus the cost basis (what you paid for it, plus additional expenses in some cases). There are exceptions to that calculation. For example, the IRS treats cost basis differently for assets received as a gift or inheritance.<\/p>\n

Anytime you sell an asset for more than you bought it, you\u2019ve \u201crealized\u201d a capital gain. That\u2019s when taxes will potentially kick in, depending on what the asset was, how long you held it and your taxable income and filing status. Note that generally gains aren\u2019t taxable until you sell the asset. Before the sale of the investment, any appreciation is considered an \u201cunrealized\u201d capital gain. (Keep in mind that mutual funds may pass along capital gains to you even though you didn\u2019t sell the mutual fund. These gains happen when the fund sells some of its holdings, and you\u2019ll likely owe capital gains tax on those payouts.)<\/p>\n

A variety of assets may be subject to capital-gains taxes, including:<\/p>\n