One Year Separates Two Very Different Tax Rates

A capital gain is short-term when the investment was held for one year or less before being sold, and long-term when it was held for more than one year. Short-term gains are taxed as ordinary income, at rates up to 37 percent, while long-term gains are taxed at preferential rates of 0, 15 or 20 percent, depending on the taxpayer’s income.

That gap means the same profit can be taxed at very different rates depending only on timing. A high earner who sells a winning position after 11 months could pay 37 percent, while waiting a few more weeks could cut the rate to 20 percent.

Capital gains taxation is a core part of the tax section of the exam and a constant in real client advice. For the full route from the exam to a career giving that advice, our complete guide to how to become an investment adviser representative covers every step.

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How the Holding Period Is Counted

The holding period begins on the day after the asset is bought and includes the day it is sold. To qualify as long-term, the asset must be held for more than one year, so a stock bought on March 10 of one year must be sold on or after March 11 of the following year.

The trade date, not the settlement date, determines both when the holding period starts and when it ends. Selling a day too early turns a long-term gain into a short-term one, which is why advisers check purchase dates before placing a sale.

Special rules apply to assets acquired in other ways. The Series 65 Exam Preparation course at FRC works through each one, including gifts, inheritances and stock received through options, so you can identify the holding period in any exam scenario.

Gifts, Inheritances and Other Special Cases

When an investment is received as a gift, the recipient usually takes over the donor’s cost basis and holding period. A gift of shares the donor has held for three years is therefore long-term in the recipient’s hands from the first day.

Inherited assets are always treated as long-term, however briefly the heir or the deceased held them. The heir’s cost basis is generally stepped up to the asset’s market value on the date of death, which can eliminate the tax on decades of growth.

Capital gain distributions from mutual funds are taxed as long-term gains regardless of how long the investor has owned the fund shares. That is a favourite exam point: the fund’s holding period of the underlying securities decides the character, not the shareholder’s.

Short-Term and Long-Term Gains Compared

2026 Long-Term Capital Gains Rates

For 2026, long-term capital gains are taxed at 0 percent for single filers with taxable income up to $49,450, or up to $98,900 for married couples filing jointly. The 15 percent rate applies above those levels, up to $545,500 for single filers and $613,700 for joint filers, and the 20 percent rate applies above that.

On top of these rates, a 3.8 percent net investment income tax applies to investment income, including capital gains, for taxpayers with modified adjusted gross income above $200,000 for single filers or $250,000 for joint filers. Those thresholds are not indexed for inflation, so the tax reaches more investors each year.

A few types of gain have their own maximum rates. Gains on collectibles, such as art, coins and precious metals, are taxed at up to 28 percent, and the part of a real estate gain that reflects past depreciation is taxed at up to 25 percent.

Worked Example: The Cost of Selling Too Soon

A single client in the 24 percent ordinary income bracket bought shares for $30,000 and sells them for $50,000, a capital gain of $20,000. Her taxable income places her in the 15 percent long-term capital gains bracket.

Step one: if she sells after holding the shares for 11 months, the gain is short-term and taxed at 24 percent, costing $4,800. Step two: if she waits until she has held the shares for more than a year, the gain is long-term and taxed at 15 percent, costing $3,000.

Step three: waiting saves $1,800, or 9 percent of the gain. Step four: the saving only makes sense if the extra holding time does not expose her to a fall in the share price larger than $1,800, so the tax benefit has to be weighed against the investment risk.

Now consider a client in the 37 percent bracket with the same gain. The difference between 37 percent and 20 percent, plus the 3.8 percent net investment income tax that applies in both cases, is $3,400 on a $20,000 gain.

How Gains and Losses Are Netted

Capital gains and losses are combined in a set order each year. Short-term gains and losses are netted against each other first, and long-term gains and losses are netted against each other separately.

If one category shows a net gain and the other a net loss, they are then netted against each other. A net short-term gain left at the end is taxed at ordinary rates, and a net long-term gain is taxed at the preferential rates.

If the final result is a net capital loss, up to $3,000 a year, or $1,500 for married individuals filing separately, can be deducted against ordinary income. Any loss above that limit carries forward indefinitely to future years and keeps its short-term or long-term character.

Worked Example: Netting a Mixed Year

A client has $10,000 of short-term gains and $4,000 of short-term losses, giving a net short-term gain of $6,000. She also has $5,000 of long-term gains and $12,000 of long-term losses, giving a net long-term loss of $7,000.

Step one: net the two results, a $6,000 short-term gain against a $7,000 long-term loss, leaving a net capital loss of $1,000. Step two: the $1,000 loss is deducted against her ordinary income, saving tax at her ordinary rate.

The losses also eliminated the whole $6,000 short-term gain, which would otherwise have been taxed at her highest ordinary rate. Using losses to offset short-term gains first is usually the most valuable use of a loss.

Study Investment Taxation With FRC

Tax questions on the exam reward a clear method: identify the holding period, classify the gain, net the categories and apply the right rate. Our Series 65 course builds that method step by step, with worked calculations and practice questions throughout.

Consider studying with FRC for every exam on your route. Explore our USA exam courses, from the SIE through the Series 7, Series 63 and Series 65.

To take advantage of the membership, explore FRC Professional Membership, which gives you a verified Digital Profile that shows employers your real-time course progress, together with the Video Resume. Current offers are on our membership deals page.

Qualified Dividends and the Same Low Rates

Qualified dividends, generally those paid by US companies and qualifying foreign companies, are taxed at the same 0, 15 and 20 percent rates as long-term capital gains. To qualify, the investor must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Non-qualified dividends, such as most distributions from real estate investment trusts and money market funds, are taxed at ordinary income rates. Interest from bonds is also taxed as ordinary income, unless it is tax-exempt municipal bond interest.

These differences matter when deciding which investments to hold in taxable accounts and which to hold in retirement accounts. Investments that produce ordinary income are often better placed in tax-deferred accounts, as explained in our article on what a 401(k) is.

Strategies Advisers Use to Manage Capital Gains

The simplest strategy is patience: where it fits the client’s goals, holding a winning position for more than a year turns a short-term gain into a long-term one. Advisers also review unrealised losses before year end and sell some to offset realised gains, a practice known as tax-loss harvesting, subject to the wash sale rule against buying back substantially identical securities within 30 days.

Giving appreciated shares to charity avoids capital gains tax on the growth while usually providing a deduction for the full market value, if the shares have been held for more than a year. Holding highly appreciated assets until death can give heirs a stepped-up cost basis, although that must be weighed against the client’s need for diversification.

Gains realised inside retirement accounts are not taxed when they occur. Our comparison of traditional IRA vs Roth IRA explains how gains are taxed, or not taxed, when money eventually leaves those accounts.

Choosing Which Shares to Sell

Investors who bought the same security at different times and prices can often choose which shares to sell. By default, brokers use first in, first out, which sells the oldest shares first and often produces the largest long-term gains.

Under specific identification, the investor tells the broker which lots to sell, for example the shares with the highest cost to minimise the gain, or the shares held more than a year to secure long-term treatment. For mutual funds, an average cost method is also available.

The choice must be made at the time of sale and confirmed in writing by the broker. Good lot selection can reduce a client’s tax bill without changing the investment decision at all.

The Memory Aid

Remember “more than a year makes it dear to keep”: a holding period of more than one year earns long-term treatment, and exactly one year is still short-term.

For the rates, remember “0, 15, 20 plus 3.8”: the three long-term rates, plus the net investment income tax for higher earners.

For netting, remember “like with like, then cross, then 3,000”. Short against short, long against long, then the two results against each other, with up to $3,000 of net loss deductible each year.

Exam Traps to Avoid

The first trap is treating a holding period of exactly one year as long-term. It must be more than one year.

The second trap is classifying inherited property by the heir’s holding period. Inherited assets are always long-term, with a stepped-up basis in most cases.

The third trap is classifying mutual fund capital gain distributions by how long the investor held the fund. They are always long-term. The fourth trap is assuming unused capital losses expire; they carry forward indefinitely, keeping their character.

A Client Scenario

A single client earning $95,000 a year holds two positions. The first shows a $15,000 gain after ten months, and the second a $9,000 loss after two years; she needs $40,000 in four months for a home deposit.

The adviser explains that selling the winning position now would create a short-term gain taxed at her ordinary rate of 22 percent. Waiting just over two months would make it long-term, taxed at 15 percent, and still leave time to meet her deadline.

The adviser also suggests selling the losing position this year to offset part of the gain, and documents how the plan balances tax savings against the risk of a price fall before the sale. The recommendation reflects her goals, time horizon and risk tolerance, the basis of every suitability judgment.

The Dictionary as a Video Library

The FRC dictionary is a study tool, not just a glossary. Every entry pairs a written explanation with deep-dive video, on-page quizzes and interactive flash cards, so you can read a concept, watch it explained and test yourself in one place.

Rules are covered in the same depth: open a rule and you will find the full explanation alongside video walk-throughs of how it applies in practice. Use the FRC dictionary to open every term in this article as its own explanation, video and quiz.

Practice Questions to Test Yourself

Question one: An investor buys shares on June 4, 2025 and sells them on June 4, 2026 at a gain. Is the gain short-term or long-term? Short-term, because the shares were held for exactly one year, not more than one year.

Question two: A client inherits shares from her father, who bought them two months before he died, and sells them three weeks later. How is any gain treated? As long-term, because inherited property is always treated as long-term.

Question three: A taxpayer has a net short-term loss of $2,000 and a net long-term loss of $5,000. How much can be deducted against ordinary income this year? $3,000, with the remaining $4,000 carried forward.

Question four: An investor bought mutual fund shares four months ago and receives a capital gain distribution. How is it taxed? As a long-term capital gain, regardless of how long the investor has held the fund.

Question five: A married couple filing jointly has taxable income of $90,000 in 2026, including a $10,000 long-term gain. What rate applies to the gain? 0 percent, because their taxable income is below the $98,900 threshold for the zero rate.

Turn Tax Knowledge Into Career Evidence

Tax-aware investing is one of the clearest ways an adviser adds measurable value, and firms look for advisers who can explain it simply. FRC’s Digital Profile shows employers the courses you are actively studying and the progress you have earned through assessed learning, verified by FRC, and a QR code on your resume takes them straight to it.

The FRC Video Resume lets a hiring manager hear you before the interview. Walking through how waiting a few weeks can cut a client’s tax bill is exactly the practical skill they want to hear.

Candidates returning to the exam should note that the wait after a third failure drops from 180 days to 60 days for exam windows opened on or after January 4, 2027, as explained in our article on the Series 65 retake rule change.

Related Questions

Continue with Traditional IRA vs Roth IRA for accounts that shelter gains from tax, and What Is a 401(k)? for workplace saving.

For tax-advantaged education saving, read 529 Plan vs Coverdell ESA, and for an investment with its own tax treatment, see Fixed vs Variable Annuity.

Key Points to Retain

A gain is long-term when the asset is held for more than one year and short-term when held for one year or less. Short-term gains are taxed at ordinary rates up to 37 percent, while long-term gains are taxed at 0, 15 or 20 percent, with the 2026 zero rate reaching $49,450 for single filers and $98,900 for joint filers, plus a 3.8 percent net investment income tax for higher earners.

Gains and losses are netted short against short and long against long, then against each other, with up to $3,000 of net loss deductible each year and the rest carried forward. Inherited assets and mutual fund capital gain distributions are always long-term, and qualified dividends share the long-term rates.

For the exam’s structure and requirements, see the Series 65 dictionary entry, and for the role the exam leads to, read our guide to what an investment advisor representative is.