The Bogleheads' Guide to Investing

by Mel Lindauer

Short- and Long-Term Capital Gains A short-term capital gain is a profit on the sale of a security or mutual fund share that is held for 12 months or less. A long-term capital gain is a profit on the sale of a security or mutual fund share that is held for more than one year. Tax rates for short-term and long-term capital gains are not the same. It’s very important for tax-savvy investors to understand the difference. Short-term capital gains are taxed as ordinary income at the shareowner’s highest marginal income tax rate, while long-term capital gains enjoy a maximum tax rate of 15 percent—approximately half. One of the easiest and most effective ways to cut mutual fund taxes significantly is to hold mutual funds for more than 12 months. Buy-and-hold is a very effective strategy in taxable accounts.