Understanding Capital Gains: Short-Term vs. Long-Term
The Rate Difference
Short-term capital gains (assets held less than one year) are taxed as ordinary income — up to 37% for high earners. Long-term capital gains (held over one year) are taxed at preferential rates: 0% for lower incomes, 15% for most taxpayers, and 20% for highest earners. High-income investors may also owe the 3.8% Net Investment Income Tax (NIIT), bringing the maximum long-term rate to 23.8%. The practical difference: selling a $100,000 gain at short-term rates could cost $37,000 in taxes vs. $23,800 at long-term rates.
Strategic Timing
When possible, hold appreciated investments for at least one year plus one day before selling. For employees with RSUs, the holding period starts at vesting — selling immediately generates ordinary income on the full value. If you hold after vesting, only additional appreciation beyond the vesting-day price qualifies for capital gains treatment (after the holding period). For concentrated stock positions, a planned selling schedule over multiple tax years can keep you in lower capital gains brackets.
Offsetting Gains
Short-term losses first offset short-term gains (saving up to 37% per dollar), then long-term gains (saving 15–20%). Long-term losses first offset long-term gains, then short-term gains. This ordering means a short-term loss is more valuable than a long-term loss. Strategic tax-loss harvesting should prioritize generating short-term losses when possible.
Key Takeaways
- 1.Short-term gains can be taxed at nearly double the long-term rate
- 2.Holding for one year plus one day unlocks preferential rates
- 3.RSU employees should understand their vesting-day cost basis
- 4.Short-term losses are more valuable than long-term losses for offsetting
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