Long-Term Capital Gains
Key Takeaways
- Long-term capital gains apply to investments held for more than one year before selling
- Tax rates are 0%, 15%, or 20% depending on taxable income — lower than ordinary income rates
- The preferential rate creates a strong incentive for buy-and-hold investing
- High-income earners may also owe a 3.8% Net Investment Income Tax on capital gains
Definition
Long-term capital gains are profits from the sale of investments held for more than one year. These gains receive preferential tax treatment in the United States, with rates of 0%, 15%, or 20% depending on the taxpayer's taxable income. This is significantly lower than short-term capital gains, which are taxed at ordinary income rates of up to 37%.
The holding period is measured from the day after acquisition to the day of sale, inclusive. If you purchase a stock on January 15, 2025, you must sell on or after January 16, 2026, for the gain to qualify as long-term. Selling one day earlier makes it a short-term gain taxed at your higher ordinary income rate.
In addition to the standard long-term capital gains rates, high-income earners may owe a 3.8% Net Investment Income Tax (NIIT), bringing the effective maximum rate to 23.8%. This surtax applies to individuals with modified adjusted gross income above $200,000 ($250,000 for married couples filing jointly).
How It Works
When you sell an investment at a profit after holding it for more than one year, the gain is reported on Schedule D of your tax return as a long-term capital gain. Your broker provides the relevant details on Form 1099-B, including the cost basis, sale proceeds, and holding period.
The tax rate applied depends on your total taxable income. For 2025, single filers with taxable income up to approximately $47,025 pay 0% on long-term gains. Income between approximately $47,026 and $518,900 is taxed at 15%, and income above $518,900 is taxed at 20%. These brackets are adjusted annually for inflation.
The preferential long-term rate is one of the most powerful tax incentives in the investment world. It encourages long-term holding, reduces portfolio turnover, and rewards patient investors. The difference between paying 15% on a long-term gain versus 35% on a short-term gain can amount to thousands of dollars on a single transaction.
Example
You bought 500 shares of Alphabet (GOOGL) at $100 per share ($50,000 total) in January 2024 and sold them in March 2025 at $170 per share ($85,000 total). Your realized gain is $35,000. Since you held the shares for more than one year, this is a long-term capital gain. At the 15% rate, you owe $5,250 in tax. Had you sold in December 2024 (less than one year), the same $35,000 gain would be taxed at your ordinary income rate. At a 32% rate, you would owe $11,200 — more than double the long-term tax. Waiting a few extra months saved $5,950 in taxes.
Why It Matters
The long-term capital gains preference is one of the most significant tax benefits available to investors. It strongly favors buy-and-hold strategies and is a key reason why frequent trading (which generates short-term gains) tends to produce worse after-tax returns than patient, long-term investing.
Tax-aware investors structure their portfolios and selling decisions around the long-term threshold. This might mean waiting a few extra months to sell a profitable position, using tax-loss harvesting to offset gains, or holding appreciated assets in taxable accounts while placing frequently traded positions in tax-deferred accounts.
Advantages
- Tax rates significantly lower than ordinary income rates (0%, 15%, or 20% vs. up to 37%)
- Encourages long-term investing which historically produces better returns
- 0% rate bracket allows some investors to realize gains completely tax-free
- Stepped-up basis at death eliminates long-term gains on inherited assets entirely
Limitations
- Requires holding investments for more than one year to qualify
- High-income earners face an additional 3.8% Net Investment Income Tax
- Preferential rates may change with future tax legislation
- Holding for tax purposes may conflict with optimal investment timing
Frequently Asked Questions
Related Terms
Browse more definitions in the financial terms glossary.