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What Are Long-Term Holdings and Capital Gains Taxes?

Anytime you sell an investment, you should consider the potential tax consequences. Generally, long-term holdings generate better capital gains tax rates for investors. You can also use tax-loss harvesting to lower your bill or move into a lower income tax rate come April. 

🤔 Understanding long-term holdings and capital gains taxes

Experts generally agree that a long-term buy-and-hold approach with a diversified portfolio leads to better outcomes. Riding out the market’s highs and lows over the years often generates higher returns—and a lower tax bill. 

What is a holding period?

Your holding period is the length of time between acquiring and selling an asset. The IRS considers short-term holding periods to be less than one year, while long-term holding periods last a year or more. Your holding period directly affects your capital gains tax rate.  

What are capital gains?

Capital assets include stocks, bonds, real estate, precious metals, and jewelry. When you sell a capital asset, you’ll incur either a capital gain (profit) or capital loss. The IRS requires you to report these on your tax return and pay the appropriate capital gains taxes on any profits. 

Long-term capital gains tax rates

The long-term capital gains rate applies to assets held for at least one year. Depending on your income, you’ll pay 0%, 15% or 20% on long-term gains. (Higher-net-worth individuals may pay an additional 3.8% net income investment tax.) 

Short-term capital gains tax rates

The short-term capital gains tax rate applies to assets held for less than a year. The IRS taxes short-term gains at your regular federal income tax bracket rate. For the 2021 tax year, these rates range from 10% up to 37%.   

Taking advantage of tax-loss harvesting

Some investors use tax-loss harvesting as a way to shed poorly performing securities and lower their tax bill simultaneously. Essentially, this strategy involves “harvesting” (selling) losing investments to generate capital losses, lowering both your total gains and your tax bill. Many investors begin pruning in December as part of their last-minute bid to find tax savings. 

The IRS also extends a small break to investors who incur more capital losses than gains. If your portfolio produces a net loss for the year, you can write off up to $3,000 against your taxable income. You can even carry larger losses into future years to offset future income. 

What this means for you

Most market experts advocate a buy-and-hold strategy to ride out market waves and avoid timing the market. But long-term holdings boast other benefits, too—namely, a lower capital gains tax bill. By contrast, short-term holding periods often come with a higher tax bill and may be more susceptible to short-term price volatility. 

That said, you can still use both long- and short-term holdings to your advantage. Strategies like tax-loss harvesting let you weed out the losers and take a hit for tax purposes, all while avoiding a higher short-term tax burden. 

You should always consider the tax consequences of buying and selling securities before making trades. For most people, a long-term holding period produces greater benefits thanks to:

  • Riding out market volatility
  • Lower long-term capital gains tax rates
  • The potential for greater long-term price appreciation

If you want to become a more efficient investor, consider an investment-management app like With AI-backed trades at your side—and the encouragement you need to stick with your long-term buy-and-hold strategy—you’ll have everything you need to achieve your investment goals.

Disclosures is the trade name of Quantalytics Holdings, LLC., LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of's investment advisory services.

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