The single most valuable rule in capital gains tax has nothing to do with clever planning - it is just patience. Hold an asset for more than a year and the federal rate can drop dramatically.
The numbers
| Short-term (1 yr or less) | Long-term (over 1 yr) | |
|---|---|---|
| Federal rate | Ordinary income, 10-37% | 0%, 15% or 20% |
| With 3.8% NIIT (top earner) | 40.8% | 23.8% |
| Set by | Your ordinary tax bracket | Your taxable income band |
For a top-bracket investor that is a 17-point gap. On a $100,000 gain: about $40,800 short-term versus $23,800 long-term - roughly $17,000 saved by crossing the one-year line.
How the holding period works
The clock starts the day after you acquire the asset and ends on the day you sell. To get long-term treatment you must sell after the one-year anniversary of that start date. A sale on exactly day 365 is short-term.
The trade-off
Waiting for long-term treatment means holding the asset longer - and bearing the market risk that it falls. The tax tail should not wag the investment dog. But when the fundamentals are sound, nudging a sale past the one-year mark is often the easiest tax saving available.
State tax adds to both. Many states tax short-term and long-term gains identically (as ordinary income), while a few - like Massachusetts - tax short-term gains at a higher rate than long-term. Compare the two side by side in the calculator, and read the full short-term vs long-term explainer.
General information, not tax advice. Verify with the IRS or a tax professional.