Guides · Money foundations
Capital Gains and the One-Year Line
Two people buy the same stock, sell for the same profit, and pay wildly different tax. The only difference is a calendar. This is the tax rule most likely to touch you the moment you start investing.
One calendar line, two tax treatments
When you sell an asset for more than you paid, the gain is taxed — and how much depends almost entirely on how long you held it.
Held more than one year, it's a long-term capital gain, taxed at 0%, 15%, or 20% depending on income. Held one year or less, it's a short-term gain and is taxed as ordinary income, at rates reaching 37%. Same asset, same profit, potentially a very different bill.
'More than one year' is exact. A holding period of exactly twelve months is short-term. Qualified dividends get the long-term rates too, if they meet holding-period and corporation tests.
The wash sale rule
Selling at a loss can reduce your tax bill, which creates an obvious temptation: sell to book the loss, buy straight back, and keep the position.
The wash sale rule closes that door. If you buy a substantially identical security within 30 days before or after the sale, the loss is disallowed for now. It isn't destroyed — it gets added to the cost basis of the replacement shares, so you recover it whenever you eventually sell those.
The window is 61 days wide in total, and it counts purchases in other accounts you control, including an IRA. This is described here so the mechanic is recognisable, not as a strategy to run.
What losses can and can't offset
Capital losses first offset capital gains, without limit. If losses exceed gains, up to $3,000 of the net loss can be applied against ordinary income in a single tax year.
Anything beyond that isn't lost — it carries forward to future years indefinitely, still available to offset future gains or another $3,000 of ordinary income each year.
This is education about how the rules work, not a recommendation to sell anything. Which assets to hold or sell depends on circumstances no lesson can see.
Hold more than one year and gains get 0/15/20% rates. Hold a year or less and they're taxed as ordinary income, up to 37%.