Short-Term vs Long-Term Capital Gains: The One-Year Rule
Holding an investment for 366 days instead of 364 can cut your tax rate nearly in half. Here is how the cutoff works and when it is worth waiting.
Capital gains tax in the United States depends on one fact more than any other: how long you owned the asset. A gain held for a year or less is taxed like wages. A gain held for more than a year is taxed at preferential rates that top out well below the ordinary income maximum.
The two rate schedules
| Short-term | Long-term | |
|---|---|---|
| Holding period | 1 year or less | More than 1 year |
| Taxed as | Ordinary income | Preferential rates |
| 2026 top rate | 37% | 20% |
| Plus NIIT | 3.8% | 3.8% |
| Effective maximum | 40.8% | 23.8% |
For 2026, single filers pay 0 percent on long-term gains while total taxable income stays under $49,450, 15 percent up to $545,500, and 20 percent above that. Married couples filing jointly get 0 percent up to $98,900 and 15 percent up to $613,700.
Stacking: why your salary matters
Long-term gains do not start in the 0 percent bracket from zero. They stack on top of ordinary income. If your wages already fill the 0 percent bracket, your gains start in the 15 percent bracket immediately.
Concrete example. You are single, earn $60,000, and take the $16,100 standard deduction, leaving $43,900 of taxable ordinary income. The 0 percent long-term bracket runs to $49,450, so you have $5,550 of room. Gains up to that amount are tax-free; everything above is taxed at 15 percent.
Counting the one year correctly
The holding period starts the day after you buy and ends on the day you sell. Buy on March 1, 2025: the clock starts March 2. Sell on March 2, 2026, and you have held for exactly one year and one day, which qualifies as long-term. Sell on March 1, 2026, and it is short-term.
This matters when a position has a large gain. On a $50,000 gain with $120,000 of ordinary income, short-term treatment taxes the gain at the 24 percent marginal rate, for $11,964. Long-term treatment costs 15 percent flat, or $7,500. Waiting a few weeks saved $4,464.
The 3.8 percent net investment income tax
High earners pay an additional 3.8 percent on the smaller of net investment income or the amount by which modified adjusted gross income exceeds $200,000 for single filers and $250,000 for married couples. It applies to both short-term and long-term gains, interest and dividends.
Rules worth knowing
- Wash sale rule: selling at a loss and buying a substantially identical security within 30 days disallows the loss. It does not apply to gains.
- Loss harvesting: capital losses offset capital gains dollar for dollar, plus up to $3,000 of ordinary income per year, with unlimited carryforward.
- Primary home exclusion: up to $250,000 of gain is excluded if single, $500,000 if married filing jointly, after two of five years of ownership and use.
- Retirement accounts: gains inside a 401(k) or IRA are not taxed on sale. Traditional accounts tax withdrawals as ordinary income; Roth accounts are tax-free if qualified.
- Specific identification: you can choose which shares to sell, which lets you sell the highest-cost lots and minimize the gain.
When it is not worth waiting
Waiting for long-term treatment is not free. The asset can fall in value, and the tax saving is only worthwhile if the expected after-tax gain exceeds the risk of holding. If a position has run up dramatically and holding it makes you uncomfortable, paying the short-term rate may be the better decision. Taxes are a cost, not the objective.