Short‑term and long‑term capital gains are taxed differently under U.S. federal law, and the distinction often comes down to a single day. Knowing which rate applies can influence your investment decisions, tax bill, and even the cost of your health coverage if your income qualifies you for premium tax credits on the ACA marketplace. This guide clarifies the rules and highlights practical planning steps.

What makes a gain short term or long term?

A capital gain (or loss) arises when you sell a capital asset—such as stocks, bonds, mutual funds, exchange‑traded funds, cryptocurrency, real estate held for investment, or a business interest—for more than your tax basis. If you held the asset for one year or less before selling, the profit is short‑term. If you held it for more than one year (one year plus a day), it is long‑term. The holding period generally starts the day after you acquire the asset and includes the day you sell it. When you sell multiple lots, the method you choose to identify which shares you sold (e.g., specific identification vs. FIFO) determines the holding period and basis for each lot.

How tax rates differ and when they apply

Short‑term gains are taxed at your ordinary income tax rates, the same brackets that apply to wages and interest. Long‑term gains receive preferential rates of 0%, 15%, or 20%, depending on your taxable income and filing status. High‑income taxpayers may also owe the 3.8% Net Investment Income Tax (NIIT) on the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds certain thresholds. State and local taxes may apply separately. Special rules exist: collectibles (e.g., art, certain coins) can face a 28% maximum long‑term rate; unrecaptured Section 1250 gain from real estate depreciation can be taxed up to 25%; and the sale of a primary residence may qualify for an exclusion of up to $250,000 ($500,000 if married filing jointly) if ownership and use tests are met.

Planning around the 1‑year mark

Because long‑term gains are typically taxed at lower rates, waiting until you cross the one‑year holding period can reduce your tax bill. Tax‑loss harvesting—selling investments at a loss to offset gains—can further manage your liability, but be mindful of the wash‑sale rule, which disallows a loss if you buy a substantially identical security within 30 days before or after the sale. Where possible, use specific‑lot identification to choose higher‑basis or longer‑held shares when selling. Consider netting: short‑term losses first offset short‑term gains; long‑term losses offset long‑term gains; remaining net amounts offset each other. Estate planning considerations, such as potential step‑up in basis at death, can also influence timing.

Do capital gains affect affordable health insurance plans?

Realized capital gains increase adjusted gross income and, therefore, MAGI, which the Affordable Care Act uses to calculate premium tax credits. If your MAGI rises after selling assets, your subsidy can shrink, increasing what you pay for coverage during reconciliation at tax time. This interaction matters for individuals evaluating individual health coverage options and other health insurance coverage options on the marketplace. If you expect a large gain, consider the timing and partial sales to manage MAGI across calendar years while you compare medical insurance quotes and assess how your net premium might change.

Medical insurance cost comparison: why MAGI matters

Because marketplace subsidies phase out as income climbs, investors sometimes perform a medical insurance cost comparison alongside tax planning. If realizing a gain pushes MAGI higher, premiums net of subsidies can rise even if your pre‑subsidy premium is unchanged. Below is a general snapshot of unsubsidized silver‑tier premiums that many consumers encounter when shopping for coverage; actual costs vary by state, county, age, tobacco status, and plan design.

Prices, rates, or cost estimates mentioned in this article are based on the latest available information but may change over time. Independent research is advised before making financial decisions.

If you rely on subsidies, weigh whether realizing a gain late in the year might change your annual MAGI enough to affect your final premium tax credit. Keeping records and estimating income periodically can help avoid large reconciliations.

Additional considerations and exceptions

Not all asset sales are treated alike. Tax‑advantaged accounts such as IRAs and 401(k)s shield investment activity from current capital gains taxes; taxes are deferred (traditional) or eliminated on qualified withdrawals (Roth). Gifts carry over the donor’s basis and holding period, while inherited assets typically receive a basis step‑up to fair market value on the decedent’s date of death, resetting the holding period to long term. For small business or real estate owners, installment sales can spread recognition of gains across years, potentially managing brackets, NIIT exposure, and interactions with health marketplace subsidies.

Conclusion Short‑term gains are taxed at ordinary rates; long‑term gains generally receive lower rates, with notable exceptions for specific asset categories. Thoughtful timing, loss harvesting, and lot selection can meaningfully adjust your tax outcome. Because realized gains feed into MAGI, they can also affect marketplace health insurance affordability, making coordinated planning useful when evaluating coverage and estimating year‑end income.