---
title: Capital gains (short-term vs long-term) — what it means and why it matters | Allocate AI
description: Profit from selling an investment for more than you paid; gains on assets held over a year get lower tax rates than gains on assets sold sooner.
canonical: https://allocateai.io/glossary/capital-gains
site: Allocate AI — https://allocateai.io
---

# Capital gains (short-term vs long-term)

Profit from selling an investment for more than you paid; gains on assets held over a year get lower tax rates than gains on assets sold sooner.

A capital gain is the profit when you sell something for more than your cost basis. The tax depends on how long you held it. Sell within one year and the gain is short-term, taxed as ordinary income at your regular bracket rate, up to 37%. Hold for more than a year and it is long-term, taxed at 0%, 15%, or 20% depending on income, with an extra 3.8% net investment income tax for higher earners.

The difference is large. Someone in the 32% bracket who sells $40,000 of gains after eleven months owes about $12,800. Waiting six more weeks to cross the one-year line drops the tax to about $6,000 at the 15% rate. Same shares, same profit, half the tax.

Losses work in reverse. Capital losses offset capital gains, and up to $3,000 of extra losses can offset ordinary income each year, with the rest carried forward.

For people with RSUs and ESPP shares, the holding clock starts on the vest or purchase date, not the grant date, and the cost basis is the value on that day. Selling RSUs the day they vest produces almost no gain, since the basis equals the sale price; the income tax was already paid at vest. The common mistake is holding shares to reach long-term status while a concentrated position grows riskier, or selling a mix of lots without checking which ones are long-term and which are not.

## Related terms

- [Cost basis](https://allocateai.io/glossary/cost-basis) — What you paid for an investment, including fees, or the value you were taxed on when you received it; the starting point for measuring gain or loss.
- [Tax-loss harvesting](https://allocateai.io/glossary/tax-loss-harvesting) — Selling investments that have dropped in value to lock in a loss that offsets taxable gains or income, then buying something similar to stay invested.
- [Wash sale](https://allocateai.io/glossary/wash-sale) — Selling an investment at a loss and buying the same or a nearly identical one within 30 days before or after, which disallows the loss for tax purposes.
- [RSU (restricted stock unit)](https://allocateai.io/glossary/rsu) — A promise from your employer to give you shares of company stock on a future date, as long as you are still there when that date arrives.

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