Short-term vs Long-term gains and losses
There are 2 types of gains and losses: short-term and long-term.
- Short-term capital gains and losses are those realized from the sale of investments that you have owned for 1 year or less.
- Long-term capital gains and losses are realized after selling investments held longer than 1 year.
The key difference between short- and long-term gains is the rate at which they are taxed.
Short-term capital gains are taxed at your marginal tax rate on ordinary income. The top marginal federal tax rate on ordinary income is 37%.
For those subject to the net investment income tax (NIIT), which is 3.8%, the effective rate can be as high as 40.8%. And with state and local income taxes added in, the rates can be even higher.
But for long-term capital gains, the capital-gains tax rate applies, and it's significantly lower.