Short-term vs. long-term capital gains: how holding period changes your tax bill
This article was produced with AI assistance.
The length of time you own an asset before selling it determines whether you pay a lower tax rate or a higher tax rate on your profits. If you own an asset for more than one year, your profits qualify as long-term capital gains, which are taxed at lower rates [1]. These long-term rates are 0%, 15%, or 20% depending on your taxable income and filing status [4]. If you own the asset for one year or less, your profits are short-term capital gains and are taxed at your ordinary income tax rates, which are the same rates applied to your regular earnings like wages [2].
To find your holding period, which is the length of time you own an asset, you must follow specific rules. You begin counting on the day after you acquire the asset [3]. You stop counting on the day you sell or dispose of the asset [3]. If your calculated holding period is one year or less, any profit or loss is short-term [2]. If your holding period is more than one year, the profit or loss is long-term [1].
When you file your taxes, you must combine all of your capital gains and losses for the year to determine your net capital gain [4]. A net capital gain is the remaining profit after you subtract your capital losses from your capital gains [4]. You report these gains and losses on Schedule D of Form 1040 [4].
Some taxpayers must also calculate their taxes under the Alternative Minimum Tax (AMT) [5]. The AMT is a separate tax system that uses different rules than the regular income tax system [5]. This tax applies to taxpayers who have certain types of income that receive favorable tax treatment, or who qualify for certain deductions [5]. If the tax calculated under the AMT rules is higher than your regular tax, you must pay the higher AMT amount [5].
To prepare for your tax filing, gather your purchase and sale records, including the exact dates you acquired and sold each asset. Use these dates to calculate your holding periods and determine whether your gains are short-term or long-term.