When Are Stocks Considered Long-Term vs. Short-Term?
Understand how the duration of your stock ownership determines its classification and tax implications. Plan smarter investments.
When investing in the stock market, the duration you hold an investment significantly influences its tax treatment upon sale. The Internal Revenue Service (IRS) categorizes capital gains based on how long you own an asset, directly impacting the tax rates applied to profits. Understanding this distinction between short-term and long-term holding periods is important for investors, as it helps determine your tax obligation and can influence investment strategies.
Defining Stock Holding Periods
The Internal Revenue Service (IRS) defines specific holding periods to classify capital gains or losses as either short-term or long-term. An asset, such as a stock, is generally considered short-term if it is held for one year or less. Conversely, an asset held for more than one year before its disposal is classified as long-term.
Calculating the holding period begins the day after you acquire the asset and includes the day you sell or dispose of it. For example, if you purchase shares of a stock on January 5, 2025, your holding period begins on January 6, 2025. If you sell those shares on January 5, 2026, the gain would be considered short-term because the holding period is exactly one year or less. However, if you sell on January 6, 2026, the gain would be long-term, as you have held the stock for more than one year.
Taxation of Short-Term Capital Gains
Profits realized from the sale of stocks held for one year or less are categorized as short-term capital gains. These gains are taxed at an individual’s ordinary income tax rates, meaning they are subject to the same tax rates that apply to your wages and other regular income.
Ordinary income tax rates for 2025 range from 10% to 37%, depending on your total taxable income and filing status. These rates are generally higher than the preferential rates applied to long-term capital gains, which can significantly impact the net profit from a quick sale.
Taxation of Long-Term Capital Gains
When stocks are held for more than one year before being sold for a profit, the resulting long-term capital gains are subject to preferential tax rates. These rates are typically lower than ordinary income tax rates, offering a tax advantage for longer-term investments. For the 2025 tax year, the common long-term capital gains tax rates are 0%, 15%, and 20%.
The specific rate applied depends on your taxable income and filing status. For instance, single filers with taxable income up to $48,350 and married couples filing jointly with taxable income up to $96,700 may pay a 0% long-term capital gains tax rate. The 15% rate generally applies to single filers with taxable income between $48,351 and $533,400, and married couples filing jointly with taxable income between $96,701 and $597,550. The highest long-term capital gains rate of 20% is reserved for very high-income earners. Additionally, high-income taxpayers may also be subject to a 3.8% Net Investment Income Tax (NIIT) on certain investment income, including capital gains, if their modified adjusted gross income exceeds specific thresholds.