How are short-term and long-term capital gains taxed differently?

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Holding period is what shapes capital gains tax. If you sell an asset you’ve owned for one year or less, the gain is a short-term capital gain and is taxed at your ordinary income tax rates—the same brackets that apply to wages and other ordinary income. Those rates go up to the top marginal rates based on your total income.

If you hold the asset longer than one year, the gain becomes a long-term capital gain and is taxed at reduced rates: 0%, 15%, or 20%, depending on your taxable income and filing status. This structure is designed to encourage longer-term investing.

So the best description is that short-term gains are taxed at ordinary income rates, while long-term gains benefit from the lower long-term rates. The other ideas—that both are taxed the same, that short-term gains are tax-exempt, or that long-term gains are taxed at higher rates—don’t reflect how the tax system treats gains based on how long you hold the asset.