In the US Capital Gains Tax (CGT) system, the length of time you hold an asset before selling makes all the difference. The IRS rewards investors who hold their assets over the long term.
The time distinction:
- Short-Term Capital Gains: If you buy an asset and sell it within 1 year or less. Gains are added to your Ordinary Income and taxed at your marginal rate (up to 37%).
- Long-Term Capital Gains: If you hold the asset for more than 1 year (1 year and 1 day). Taxed at very preferential fixed rates: 0%, 15% or 20%, depending on your income level.
⚠️ Important
Net Investment Income Tax (NIIT): High-income investors (above $200,000 if single, or $250,000 if married) may need to pay an extra 3.8% on investment income. Even with this surcharge, the long-term rate is always more tax-efficient.
💡 Example
If you earn $10,000 selling shares after 6 months, and your marginal rate is 32%, you would pay approximately $3,200 in tax. If you wait to sell those same shares after 13 months, the gain becomes Long-Term, likely taxed at 15%. You would pay $1,500. Waiting a few months could save $1,700.