A capital gain is short term or long term, and which one it is depends entirely on how long you held the asset. Long term gains are taxed at preferential rates. Short term gains are taxed as ordinary income, at whatever rate your other income puts you in.
The gap between those two treatments is large, and the line between them is a single day.
How the holding period is counted
More than one year is long term. One year or less is short term.
The counting rule is more specific than “a year”, and it is where mistakes happen. You count from the day after the day you acquired the asset, up to and including the day you disposed of it.
So the day you bought does not count and the day you sold does. An asset bought on 10 March and sold on 10 March the following year is held for exactly one year, which is not more than one year, and the gain is short term. Selling on 11 March makes it long term.
There is no proportioning and no partial credit. A sale one day early does not move part of the gain, it moves all of it into ordinary rates.
The rates, including the two people forget
Long term gains are generally taxed at 0, 15, or 20 percent, depending on your income.
Two special rates sit outside that, and both catch people who assume every long term gain is treated alike:
- 28 percent on gains from collectibles, such as coins or art, and on qualified small business stock under section 1202
- 25 percent maximum on unrecaptured section 1250 gain, which is the depreciation element of a gain on real property
That second one is why selling a rental is not a single capital gain calculation. The depreciation portion is carved out and taxed at a higher maximum rate, which is covered in depreciation on a rental, and why it matters when you sell.
Losses, and the limit that surprises people
Net capital losses offset capital gains without limit. Against ordinary income the deduction is capped at 3,000 dollars a year, or 1,500 dollars if married filing separately.
Anything beyond that carries forward to later years, subject to the same annual cap. A large loss year is therefore not deducted in that year. It is deducted slowly, potentially over a very long time, and it is an asset you have to keep track of yourself across returns.
The wash sale window is 61 days, not 30
Selling at a loss and buying back too soon disallows the loss. Almost everybody knows that and almost everybody has the window wrong.
It is 30 days before the sale and 30 days after, plus the day of sale itself. Sixty one days in total. Most published writing says “30 days” and is wrong by half, because it counts only forward.
That matters practically. Somebody who bought more shares three weeks before selling at a loss has triggered the rule without ever repurchasing afterwards. Regular monthly investing into the same holding does this routinely and invisibly.
One thing that is more encouraging than people expect: the disallowed loss is not lost. It is added to the basis of the replacement shares, so it comes back when those are eventually sold without a further wash. It is deferred, not destroyed.
Do not accept the broker’s basis without looking
Sales are reported on Form 8949 and summarised on Schedule D, and the starting point is your Form 1099-B. The question is whether the basis on it is right.
Covered securities are those where the broker must report basis to the IRS. That covers stock acquired after 2010, mutual funds and dividend reinvestment plans generally after 2011, certain debt instruments, options and warrants after 2013, and, newly, digital assets acquired after 2025.
Noncovered securities are everything else, and for those the basis may be missing or may be shown without having been reported to the IRS.
Basis is most often wrong in three situations: shares from an employer plan, where the compensation element has already been taxed and should be in the basis; anything transferred between brokers, where the history may not have travelled with it; and older holdings that predate the reporting rules.
The correction is mechanical, and it matters that it is done visibly rather than by substituting a number:
- Where basis was not reported to the IRS, enter the correct basis in column (e) and leave column (g) blank.
- Where basis was reported to the IRS but is wrong, enter the reported amount in column (e), put the adjustment in column (g), and enter code B in column (f).
That way the return matches what the IRS was told and then shows plainly why your figure differs. Quietly entering a different number invites a notice.
Before year end
Check the holding period on anything you are thinking of selling, and check the actual purchase date rather than the year. A few days of patience can change the rate on the whole gain.
If you are harvesting a loss, count the full 61 days in both directions, including any automatic purchases you have forgotten about.
And keep your own basis records, especially for anything from an employer plan or anything that has moved between brokers, because those are the two cases where the 1099-B is least likely to be right.
Getting the basis right, and the corrections shown properly rather than substituted, is part of preparing a return with investments in it.