Long-Term and Short-Term Capital Gains: What’s the Difference?

Selling a capital asset for more than you paid results in a capital gain. Capital assets include stocks, bonds, property, and precious items like gems or metals. The IRS taxes short-term and long-term capital gains differently. Knowing these differences between long-term vs short-term capital gains can help you plan your sales and reduce taxes.

Short-Term Capital Gains

Short-term gains occur when you sell an asset after holding it for one year or less. These gains get taxed as regular income, meaning they fall under your usual tax rate. The IRS applies marginal rates to short-term gains, ranging from 10% to 37%. When comparing long-term vs short-term capital gains, short-term gains typically result in higher taxes.

Long-Term Capital Gains

Long-term gains apply when you hold an asset for over a year before selling. These gains receive favorable tax treatment. In some cases, long-term gains might even be tax-free. So, when you plan to sell an asset, consider how long you’ve held it. Holding longer could reduce your tax bill and increase your profit. The key difference in long-term vs short-term capital gains lies in this favorable tax treatment.

Deferring Capital Gains with a 1031 Exchange

You can defer paying capital gains taxes through a 1031 Exchange. This process lets you reinvest proceeds from a sale into a new “like-kind” property. By doing this, the IRS allows you to delay paying capital gains taxes until you eventually sell the replacement property. However, certain rules must be followed for the exchange to qualify. A Qualified Intermediary can guide you through these requirements. Understanding long-term vs short-term capital gains can also benefit your 1031 Exchange strategy.

Start a 1031 Exchange Today!

Deferring capital gains can free up funds for a bigger or higher-yielding property. With the right tax strategy, your options are virtually endless. If you’re interested in learning more, we’re here to help. Schedule a free consultation by mentioning this blog post and calling (888) 508-1901.

Chris Peterson — Texas Licensed Attorney & Founder, WealthBuilder 1031

Chris is the Owner and President of WealthBuilder 1031 and a licensed Texas attorney. He graduated from Wheaton College and the University of Texas School of Law and speaks regularly to realtors, accountants, and title companies about 1031 exchanges. Learn more →