The one-year line
Long-term capital gains — assets held more than a year — are taxed at preferential rates, currently 0%, 15% or 20% federally depending on taxable income. Short-term gains are taxed as ordinary income, which for many investors is 22% to 37%. On a $45,000 gain, crossing that line can be worth more than $4,000. If a sale is close to the anniversary, waiting is often the highest-return decision available.
Basis is where mistakes happen
Your cost basis is what you paid plus commissions, adjusted for reinvested dividends, stock splits and return-of-capital distributions. Reinvested dividends are the most commonly missed adjustment — forgetting them means paying tax twice on the same money. Brokers report basis for most securities acquired after 2011, but older holdings and transferred accounts frequently carry gaps you must reconstruct.
Tax-loss harvesting
Selling losing positions to realise losses that offset gains is one of the few genuinely free improvements in investing. Watch the wash sale rule: repurchasing the same or a substantially identical security within 30 days either side disallows the loss. Buying a different fund tracking a different index is the standard workaround.
Other rates that can apply
- Net investment income tax of 3.8% applies above certain modified AGI thresholds.
- Collectibles are taxed at up to 28%.
- Depreciation recapture on real estate is taxed at up to 25%.
- State tax varies from zero to over 13%, and most states offer no preferential rate for long-term gains.
Ways to defer or avoid
Holding assets in tax-advantaged accounts removes the issue entirely. Donating appreciated securities to charity avoids the gain and may generate a deduction at full market value. The primary residence exclusion shelters a substantial gain on a home you lived in for two of the last five years. And assets held until death currently receive a stepped-up basis.
Estimates only. Capital gains rules are detailed and change — consult a tax professional before acting.