Short-Term vs Long-Term Capital Gains: Cost Gap

A $100,000 stock gain realized at 11 months and 29 days costs a high-earning single filer up to $37,000 in federal tax. Hold the same position 48 hours longer, past the one-year mark, and the federal bill can drop to $20,000 — plus the 3.8% net investment income tax in both cases. That 17-percentage-point spread between short-term and long-term treatment is the single largest controllable variable in the entire capital gains code, and it turns on a calendar date rather than any financial decision.

The gap is widely known to exist. What gets lost is its actual dollar magnitude at $150k+ income, where short-term gains stack on top of wages already taxed at 32% or 35%, and where the net investment income tax and state rates compound the difference further. The numbers below are built on 2025 tax-year figures from IRS revenue procedures and Topic guidance.

The federal rate gap, in numbers

Short-term capital gains (STCG) — assets held one year or less — receive no preferential treatment. They are taxed at ordinary income rates, which for 2025 range from 10% to 37%. For a $150k+ household, the relevant brackets are the top three. A single filer hits the 32% bracket at $197,300 of taxable income, 35% at $250,525, and 37% at $626,350 in 2025; for married filing jointly, the 37% bracket begins at $751,600.

Long-term capital gains follow a separate, far flatter schedule. For 2025, the 0% rate applies when taxable income is at or below $48,350 single and $96,700 married filing jointly; the 15% rate runs up to $533,400 single and $600,050 married filing jointly; the 20% rate applies above those thresholds. A household earning $150k+ in wages alone has already exhausted the 0% band, so the practical choice for most readers is 15% versus 20% on the long-term side, against 32%–37% on the short-term side.

Sources: IRS Rev. Proc. 2024-40 §3.03 (LTCG brackets, 2025); IRS Topic No. 409 (rate structure); IRS Topic No. 559 (NIIT), 2025 tax year.

The headline 17-point gap understates the real difference for this income group, because short-term gains are taxed as the last dollars of an already-high income — the marginal layer — while the long-term rate is a flat schedule that does not stack the same way. A detailed look at net after-tax return by income level shows how the marginal stacking widens the spread further as wage income rises.

NIIT: the 3.8% that applies to both

One layer applies regardless of holding period. The net investment income tax is 3.8% on the lesser of net investment income or the amount by which modified adjusted gross income exceeds $250,000 for married filing jointly, $200,000 for single filers, and $125,000 for married filing separately. Capital gains — short-term and long-term alike — count as net investment income.

What makes NIIT distinctive at this income level is that its thresholds never move. The $200,000 and $250,000 income thresholds are not indexed for inflation, unlike the LTCG brackets and ordinary income brackets, which adjust upward each year. Set by 2013 statute and never adjusted, the thresholds pull more households across the line with every year of wage growth. For a $150k+ household, NIIT is not a tail risk — it is a near-certainty on any meaningful gain. The mechanics of when the 3.8% surtax applies matter because the tax hits the lesser of two amounts, so a large one-time gain can pull otherwise-sheltered investment income into the calculation.

Because NIIT applies to both gain types, it does not widen the short-term/long-term gap — it raises the floor under both. A long-term gain taxed at 20% becomes 23.8% federal with NIIT; a short-term gain at 37% becomes 40.8%. The 17-point gap holds; the absolute cost of each path rises.

A $100,000 gain, four ways

Consider a single filer with $300,000 of wage income — squarely in the $150k+ target and into the 35% ordinary bracket — who realizes a $100,000 gain. Wage income alone has already pushed modified adjusted gross income past the $200,000 NIIT threshold, so the full gain is exposed to the 3.8% surtax. The table models the federal-only outcome, then adds California as the high-state-tax reference.

Sources: IRS Rev. Proc. 2024-40 §3.03 and IRS Topic Nos. 409, 559, 2025 tax year. The 20% LTCG rate applies because total taxable income (≈$300k wages + $100k gain, less deductions) exceeds the $533,400 single threshold only in part; the portion above the threshold is taxed at 20%. For modeling clarity the table applies 20% to the full gain, the conservative high case.

The difference is $15,000 in federal tax on an identical economic gain — 15% of the entire position — determined solely by the holding period crossing the one-year line. Now add state tax. California does not have a special capital gains rate; all capital gains are taxed as ordinary income, and high earners may owe the 3.8% NIIT when income exceeds $200,000 single or $250,000 married filing jointly. At roughly $400k of total income, the relevant California marginal rate sits near the upper-middle of its schedule.

Sources: IRS Rev. Proc. 2024-40, IRS Topic Nos. 409 and 559 (federal); California Franchise Tax Board 2025 bracket schedule (state, 10.3% marginal band applies to single taxable income above $360,659). California taxes both gain types identically, so the state layer does not widen the federal gap.

In California, the short-term path surrenders nearly half the gain. The state layer is the same 10.3% on both rows — California provides no lower rate for long-term gains; all are taxed at the same rate as ordinary income — so the entire short-term/long-term spread is a federal phenomenon. For a fuller picture across jurisdictions, the capital gains rate by state comparison shows how no-income-tax states erase the state layer entirely, while the reasons California’s rate runs highest explain the structural absence of a preferential bracket.

Finluxy After-Tax Gain Rate

Rate percentages obscure what the investor actually keeps. The Finluxy After-Tax Gain Rate expresses net gain after all applicable taxes as a percentage of the original cost basis, set against the pre-tax gain rate to show the tax haircut directly. Take a position with a $200,000 cost basis sold for $400,000 — a $200,000 gain, a 100% pre-tax gain rate. The table runs that position through each scenario above.

Finluxy After-Tax Gain Rate = net gain after tax ÷ original cost basis × 100. Tax rates per IRS Rev. Proc. 2024-40 and Topic Nos. 409, 559 (2025) and California FTB 2025 schedule. Tax haircut = pre-tax gain rate minus Finluxy After-Tax Gain Rate.

The metric reframes the decision. A nominal doubling of capital — a 100% gain — returns 76.2% on a federal-only long-term sale but only 50.9% on a short-term California sale. The investor who held an extra two days in California keeps 15 percentage points more of the original basis. The framework carries directly into the tax cost of selling before the one-year mark, where the value of waiting can be weighed against market risk over the holding window.

What most coverage overlooks

Standard treatments present the rate gap as 37% versus 20% — a 17-point federal spread — and stop there. That framing misses the layering effect that defines the cost at $150k+. A short-term gain is taxed as marginal income, landing on top of wages already in the 32% or 35% bracket, and it simultaneously raises modified adjusted gross income, which can drag additional investment income into NIIT exposure. The long-term gain, taxed on its own flatter schedule, does neither to the same degree.

The data shows the true spread for a high earner is not 17 points but closer to 15 points of the entire gain in federal tax alone — and roughly the same again is preserved by the absence of marginal stacking. In the California single-filer case above, the short-term path cost 49.1% versus 34.1% long-term: a 15-point swing that, on a $200,000 gain, is $30,000. That figure is invisible if you read only the headline rate table, because the headline compares two rates rather than two completed tax bills at a specific income. Pairing a holding-period decision with the dollar math of tax-loss harvesting can offset short-term gains that cannot be deferred, since harvested losses apply against short-term gains first.

Practical context for the $150k+ household

For a household at this income, the holding-period line is rarely an abstract tax-planning footnote — it surfaces at concrete moments: a vested RSU tranche, a concentrated position trimmed for diversification, a private-company exit. The decision is whether the tax saved by reaching long-term status justifies the market risk of holding through the remainder of the one-year window.

The arithmetic favors waiting more than most assume. On the $100,000 single-filer gain, crossing from short-term to long-term saved $15,000 federally and $15,000 combined in California. If the position sits within weeks of its one-year mark, the expected tax saving will exceed plausible short-window price movement for most diversified holdings — though a concentrated single stock near an earnings event is a different risk profile, and that judgment belongs to the investor, not a rate table. The trade-off sharpens for anyone whose gain would push taxable income across the $533,400 single or $600,050 MFJ line into the 20% LTCG band, or across the NIIT threshold, because the marginal layer is where the compounding bites.

Two structural facts deserve weight in any year-end planning. NIIT thresholds do not move with inflation, so a household that escaped the surtax five years ago at the same real income may owe it now purely from wage drift. And state treatment is binary in effect: in California the gain type changes nothing at the state level, while a no-income-tax state removes 10 points or more from every scenario above. The investor sophisticated enough to model the federal gap should model the state layer in the same exercise, because for a large gain it can dominate the federal difference. A business-sale or real-estate scenario adds further wrinkles — depreciation recapture, installment treatment, qualified opportunity zone deferral — that change the base before any of these rates apply.