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Concept · Tax in investing

What is the difference between a short-term and a long-term gain?

Direct answer A gain on an asset held more than one year is long-term and taxed at the federal 0, 15 or 20% rates. Held one year or less it is short-term and taxed as ordinary income, up to 37%. For a top-bracket Californian the difference is 17 cents per dollar of gain; California itself taxes both the same.

The clock starts the day after purchase and the line is crossed on the first anniversary plus one day. Straddles stop the clock, a constructive sale ends it, and a hedge that removes the risk of loss can disqualify a dividend from the lower rate over the same period.

Read the one-year line is worth 17 cents per dollar.

Sources

  1. IRC §1222, long-term defined as more than one yearlaw.cornell.edu
  2. IRC §1(h), rates on long-term gainslaw.cornell.edu

Used in

Eight tax levers, ranked by what they are worth Never selling is worth the whole 35 cents, the one-year line 17, an ETF about 120 basis points a year. Loss harvesting, the lever with the marketing budget, 0 to 30 after year five. Each one, priced. The dividend tax no wrapper removes An index ETF defers its capital gains almost completely. It cannot defer its dividends. At a 1.3% yield and a 35% rate, that is 46 basis points a year, and it is most of the ETF's remaining tax drag. The one-year line is worth 17 cents per dollar Everyone knows the line. In 2015 individuals still realized $3.3 billion of stock gains within three months of it, at the short-term rate. Where a known rule gets crossed early, and what it costs. What a dollar of gain keeps after tax Sell a winner at the top California bracket and 35 cents of every dollar of gain goes to tax. Sell it inside a year and 52 cents go. Where those two numbers come from.

Related concepts

Net investment income taxSection 1256 contractQualified dividend

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