Educational information, not individual financial advice.
Key Takeaways
The holding-period rule is one of the largest planning levers in the tax code, and it requires nothing more than patience.
If you hold an asset for more than one year before selling, any gain is long-term and qualifies for preferential rates (0%, 15%, or 20%). If you hold it one year or less, the gain is short-term and taxed as ordinary income at your marginal rate.
"More than one year" means one year plus at least one day. Buying on June 15, 2025 and selling on June 15, 2026 is short-term. Selling on June 16, 2026 is long-term.
The holding period starts the day after purchase and includes the day of sale.
For high earners, the difference is dramatic:
| Bracket | Short-term rate | Long-term rate | Gap |
|---|---|---|---|
| 12% | 12% | 0% | 12% |
| 22% | 22% | 15% | 7% |
| 24% | 24% | 15% | 9% |
| 32% | 32% | 15% | 17% |
| 35% | 35% | 15% or 20% | 15–20% |
| 37% | 37% | 20% | 17% |
Add NIIT (3.8%) for high earners and the short-term rate grows further.
On a $50,000 gain for a taxpayer in the 32% bracket, selling one day too early costs $50,000 × (32% − 15%) = $8,500 in additional tax. Waiting one extra day is worth $8,500.
If you already have realized losses this year that exceed your gains, short-term vs long-term matters less — the gains are offset by losses either way, and you only pay tax on net gains (short-term and long-term are netted separately, then against each other, but the end result is what's taxable).
If your ordinary income bracket equals your long-term rate (rare but possible for low-income filers where 12% ordinary roughly equals... well, never equals 0% or 15% actually), the difference would be zero. But in practice, long-term is always favored.
The rigid one-year rule occasionally creates absurd situations. An asset bought on March 15 and sold on March 14 the following year (one day too soon) is short-term. Selling March 15 makes it long-term.
If possible, plan sales at least a few days past the one-year mark to avoid holiday or weekend complications. Most brokerages settle trades T+2, so the "sale date" is the trade date, not settlement.
Special rules:
If you sell at a loss and buy "substantially identical" security within 30 days before or after the sale, the loss is disallowed and added to the basis of the replacement shares. The holding period also carries over.
This creates a coordination issue: if you sell at a loss to harvest the loss, don't buy back too soon, or the IRS disallows the loss for tax purposes.
In Horizons' tax model for taxable accounts, gains are assumed to be a blend of short-term and long-term based on typical turnover. For concrete strategy modeling (e.g., "sell position X in December 2027"), you can specify explicit sale events and the engine applies the correct rate based on the holding period you set.
Try this next
Capital Gains Tax
More related reading