A long-term capital gain is the profit on the sale of a capital asset that was held for longer than a set minimum period, which in the United States is more than one year. Long-term gains are taxed at lower rates than ordinary income in the US and several other countries, to encourage patient investment rather than rapid trading. The counterpart is the short-term capital gain, earned on assets held for the minimum period or less.
The distinction is mainly a US one. The basic calculation of any capital gain is the same, sale proceeds minus cost basis; the holding period only decides which rate applies. Other systems, including the United Kingdom's, generally tax gains at the same rate however long the asset was held, though they often have other reliefs.
Long-term capital gain in plain terms
Think of a farmer who plants an orchard and waits years for it to bear fruit, compared with a market trader who buys crates in the morning and sells them by evening. Both may make a profit, but the tax rules in some countries reward the farmer's patience with a smaller tax bill.
A long-term capital gain is the farmer's kind of profit: you bought something, held it for a long stretch, and sold it for more. In the United States the dividing line is simple. Keep an investment for more than a year before selling, and the profit usually qualifies for the lower long-term rate.
The US holding-period rule
Under the Internal Revenue Code, a gain is long-term if the asset was held for more than one year. The IRS counts the holding period from the day after the asset was acquired up to and including the day it was sold, so shares bought on 10 March 2025 must be sold on or after 11 March 2026 to qualify. Some special cases apply:
- Inherited assets are treated as long-term regardless of how long the heir held them.
- Gifted assets usually carry over the donor's holding period along with the donor's basis.
- Fund distributions. A capital gains distribution reported as long-term is taxed as long-term no matter how long the investor has owned the fund shares.
- Carried interest. Since the Tax Cuts and Jobs Act of 2017, gains allocated to fund managers through certain partnership interests need a holding period of more than three years to be long-term (section 1061).
US tax rates
Most long-term gains are taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income and filing status. The bands are raised each year for inflation. For 2025, IRS Topic 409 sets the 0% rate for taxable income up to $48,350 for single filers and $96,700 for married couples filing jointly; the 15% rate applies above that up to $533,400 (single) and $600,050 (joint), and 20% above those levels. For 2026, the IRS inflation adjustments (Revenue Procedure 2025-32) raise the 0% ceiling to $49,450 for single filers and $98,900 for joint filers.
Other rules sit on top of these bands:
- Net investment income tax. An extra 3.8% applies to investment income, including gains, for individuals whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly); these thresholds are not indexed for inflation.
- Collectibles such as art, coins and precious metals are taxed at a maximum of 28%.
- Unrecaptured section 1250 gain, the part of a property gain reflecting depreciation already deducted, is taxed at a maximum of 25%.
- Qualified dividends are taxed at the same 0%, 15% and 20% rates, which links long-term gain planning to dividend income.
A worked example: a single filer with $80,000 of taxable income, including a $10,000 long-term gain on stock, falls in the 15% band, so the gain costs , or $1,500, in federal tax. Had the same gain been short-term, it would have been taxed at the filer's ordinary rate of 22%, or $2,200.
The United Kingdom and other countries
The UK does not separate short- and long-term gains. Individuals pay capital gains tax on gains above an annual exempt amount of £3,000 (2026–27), at 18% where the gain falls within the basic-rate income band and 24% above it; these rates have applied to most assets since 30 October 2024. Gains inside an ISA or a pension are exempt. Elsewhere, some countries reduce or exempt gains after a minimum holding period, while others, such as Singapore, have no general capital gains tax at all. Investors who move country should check tax residency rules, because the right to tax a gain usually follows residence, subject to double taxation treaties.
Why long-term gains get lower rates
The preferential rate is usually justified on four grounds: it rewards the supply of funds to the capital market, long-term investment; it reduces the lock-in effect, in which high taxes on sale discourage investors from rebalancing a portfolio; it partly compensates for inflation, since tax is charged on nominal rather than real gains; and it eases the double taxation of corporate profits already taxed at company level.
Critics reply that the benefit goes mostly to high-income households, that the rate gap encourages relabelling ordinary income as capital gains, and that the "buy and hold" incentive interacts with the step-up in basis at death to let large gains escape tax entirely. The rates and thresholds are a recurring subject of US tax legislation.
Planning considerations
Investors often time sales to cross the one-year mark, use a capital loss to offset gains, and hold assets that generate frequent gains inside tax-advantaged accounts such as an IRA. Index funds and exchange-traded funds (ETFs) with low portfolio turnover tend to realize fewer gains than actively traded funds. Tax considerations should not override the investment case itself; holding a weak position only to reach long-term status can cost more than the tax saved.