Short-Term and Long-Term Capital Gains Compared

Long-term capital gains tax is paid on any investment held longer than 12 months. For an investment held and then sold in under this year limit, a much higher capital gains tax is required. The exact tax is set by the Internal Revenue Service on an annual basis. Each state charges an additional capital gains tax set on an annual basis. Regardless of the year or state, though, one rule is constant: short-term capital gains tax is much higher than its long-term counterpart.

Capital Gains Tax Explained

Capital gains is a form of income off investments of all kinds. Each investment is categorized; categories include collectibles, real estate and stock. Capital gains tax works like income tax: the more you make, the more you have to pay. Capital gains tax is progressive in the same way as income tax. However, short-term capital gain falls at the normal income tax rate. Long-term gains considerations have only two tax brackets. Capital gains tax is required from both federal and state governments.

Short vs. Long-Term Capital Gains Tax

Short-term capital gains tax is set at a higher rate than long-term capital gains. For example, in 2009, capital gains tax was as high as 35 percent for short-term holdings. Long-term holdings varied from 5 percent to 15 percent. Short-term gains are taxed more heavily to prevent speculators, such as those who "flip" property, from capitalizing on their speculation. Speculation can falsely alter the market. If an individual would like to act in this manner, he or she will have to pay more in taxes. 

Example of Short vs. Long-Term Capital Gains Tax

In terms of real estate, short versus long-term capital gains offers a complicated model. For a property held under one year, the taxes owed equal the short-term capital gains tax for the individual. If the property is held longer, the taxes owed include the long-term capital gains rate of either 5 percent or 15 percent, depending on the individual's tax bracket. This exact percentage is open to change in the future. In 2009, an individual who is above the 15 percent tax bracket for income tax owes the higher sum. For example, if a person who typically falls into the 25 percent income tax bracket sells a secondary property for a profit, he or she would owe 15 percent capital gains tax. If that same person is in the 10 percent tax bracket next year and sells another property, the person would fall in the 5 percent long-term capital gains bracket.

Capital Gains Tax Minimization

Given that you must hold a property for at least a full year to qualify for the lower capital gains tax, it is best to do so wherever possible. This includes all properties, such as stocks and bonds, in addition to real estate. If you must sell the property in less than one year, you should consider options to minimize taxes owed. For example, in real estate, the 1031 option allows for tax deferral if profits are applied to the purchase of a new property. Ask an accountant for advice on legal forms of tax minimization.