Key takeaways

• Long-term capital gains are taxed at lower rates than short-term gains when assets are held for more than one year.

• Holding investments longer than one year can reduce the taxes owed compared to selling sooner.

• Capital losses can offset gains, and unused losses can be carried forward to future tax years.

Long-term capital gains may lower your tax bill because gains on assets held over a year are taxed differently than short-term gains.

Investments can carry tax consequences, including on the gains realized when assets are sold. The good news is that long-term capital gains generally have a more favorable tax treatment, meaning you can potentially reduce your overall tax liability. Before you start investing, it’s important to understand the potential tax consequences and how those taxes will affect your overall investment returns.

Understanding long-term capital gains and losses

Anytime you sell an asset, there are potential tax consequences. Capital assets, including stocks, bonds, real estate, and other investments, can result in either capital gains or losses when sold. If you sell an asset for more than your original purchase price, you generally have a capital gain, which could be subject to taxation. You’ll pay taxes on the difference between your basis — usually meaning the amount you purchased the asset for — and the price when you sell it.

Meanwhile, when you sell an asset for less than you bought it, you have a capital loss, which can help reduce your tax liability.

Capital gains classifications and tax rates

For federal tax purposes, capital gains can be either long-term or short-term, depending on how long you hold the asset. Assets held for one year or less are subject to short-term capital gains taxes, and are taxed as ordinary income, while assets held for longer than one year are subject to long-term capital gains taxes. Long-term capital gains are typically taxed at lower rates, meaning there may be a benefit to holding onto your assets for longer before you sell them.¹

Short-term capital gains are taxed at the same rate as your ordinary income. Meanwhile, long-term gains are taxed at either 0%, 15%, or 20%. The rate you pay is based on your taxable income. Just like with ordinary income tax rates, the higher your income, the higher your long-term capital gains tax rate.

The tax treatment of capital gains at the state level typically differs from the federal level including a number of states that don’t have an income tax and therefore don’t tax capital gains at all.

Exceptions to standard capital gains tax treatment

While the standard long-term capital gains tax rates apply to most assets, there are a few exceptions. First, and perhaps most relevant for most Americans, is the capital gains tax exclusion for selling a home. When you sell a home, you can exclude $250,000 of your gain (or $500,000 for a married couple) if you’ve owned and lived in the home as a principal residence for at least two of the past five years.¹

Here are a few other assets that may have different capital gains rules, along with their maximum capital gains tax rates:²

• Section 1202 small business stock: maximum 28% rate
• Collectibles (including coins or art): maximum 28% rate
• Unrecaptured section 1250 gain from selling section 1250 real property: maximum 25% rate

Offsetting gains with capital losses

Just like capital gains may be taxed, capital losses could be used to reduce tax liability. First, you can use your capital losses to offset your capital gains. For example, if you have a $100 capital gain on one asset and a $100 capital loss on another, the two will offset, and no taxes will be owed.

The IRS also allows you to claim up to $3,000 in capital losses that exceed your capital gains. Finally, you could be able to carry forward your unused capital losses to help offset capital gains in future years.³

Read more: What are short-term capital gains taxes?

Examples of long-term capital gains

To gain a greater understanding of long-term capital gains taxes, it can be helpful to demonstrate through an example.

First, let’s compare the difference between short-term and long-term capital gains. Suppose Mary and Bob both purchased 500 shares of stock for a price of $25 per share, a total price of $12,500. Both decide to sell the stock once the stock reaches $30 per share, resulting in a $5 per share gain — that’s a total of $2,500.

The key difference is that Mary only owned the stock for nine months, while Bob owned the stock for more than one year. As a result, Mary will pay short-term capital gains taxes, while Bob will pay long-term capital gains taxes.

The key difference is how long they held their investments. Mary sells her shares after nine months, while Bob holds his for more than one year. Because Mary held her investment for less than a year, her $2,500 gain is a short-term capital gain and taxed at her ordinary income tax rate. With a taxable income of about $100,000, Mary falls into the 22% federal tax bracket for tax year 2026, meaning she’ll owe roughly $550 in taxes on her $2,500 gain.

Bob, on the other hand, qualifies for the long-term capital gains rate because he held the stock for more than one year. With the same income, his gain falls into the 15% long-term capital gains bracket, so he’ll owe about $375 in taxes. That’s a savings of roughly $175 compared to Mary — simply for holding his stock a few extra months.

Of course, real-world results can vary. For instance, if either Mary or Bob had another investment that lost value, they could sell it and use that capital loss to offset their gains, a strategy known as tax-loss harvesting. The rules also differ depending on the type of asset — for example, the sale of a primary home can qualify for special exclusions that reduce or even eliminate capital gains tax.

Advantages of long-term capital gains

Holding an asset for more than one year before selling it has a clear financial advantage: long-term capital gains are taxed at lower rates than short-term gains. In 2026, a single filer with taxable income up to $49,450 pays 0% on long-term capital gains, while short-term gains in that same income range are taxed at ordinary income rates up to 12%.

At the higher end of the scale, a single filer with taxable income above $545,500 pays a 20% long-term capital gains rate, compared to the top ordinary income tax rate of 37% on short-term gains. Across every bracket, long-term gains receive more favorable treatment, rewarding investors who hold their assets for at least one year.

These tax savings don’t just benefit investors today — reinvesting those savings can compound over time, potentially increasing long-term returns.

That said, long-term investing isn’t always the right approach for everyone. Active traders and day traders, for example, aim to profit from short-term market movements and accept higher short-term tax rates as part of their strategy. Still, for most investors, building a diversified portfolio and holding assets over time is both a sound investment strategy and a tax-efficient one.

Read more: How to avoid capital gains tax

Solid planning for long-term capital gains

Strategic planning is an important step in helping to reduce your investment taxes and maximize your long-term wealth growth. First, it’s important to track your holding periods and basis for investments to ensure that when you sell assets, you’re able to optimize your outcomes. Luckily, your brokerage firm can assist you in this effort.

You may also consider working with a financial professional who can help you build an optimized portfolio that best helps you reach your financial goals while reducing your tax liability along the way.

Federal long-term capital gains tax rates 2025

Long-term capital gains are taxed at three different rates: 0%, 15%, or 20%. The amount you’ll pay depends on your taxable income and tax filing status.⁴ As with other taxes, the IRS adjusts the income ranges for capital gains taxes each year to account for inflation. The following rates and tax brackets apply to long-term capital gains on assets sold in 2025, which are reported on taxes filed in 2026.

Federal long-term capital gains tax rates 2026

The table below shows the long-term capital gains rates and tax brackets for assets sold in 2026, which are reported on taxes filed in 2027.⁵

The bottom line

Holding your investments for more than one year can help you leverage the lower long-term capital gains tax rates and keep more of your investment returns. This one simple change can potentially help you save hundreds — or even thousands — of dollars in capital gains taxes.

Of course, taxes shouldn’t be your only consideration when investing. It’s also important to consider your investment goals, risk tolerance, time horizon, and the current market conditions when planning your investment moves.

It’s also worth acknowledging just how complex these decisions can be. If you don’t feel comfortable or qualified to direct your own investments, especially as it relates to the tax consequences, consider seeking professional guidance. A financial or tax professional can offer insight on your unique situation.