How Capital Gains Are Taxed: Short-Term Vs Long-Term Gains
- Nisha Mehta, MD
- Oct 29
- 6 min read
As you build your investment portfolio, understanding capital gains and the difference in taxation of short-term vs long-term capital gains can have a huge impact on your financial planning and wealth management, as taxes play a large role in how much of your investment returns you actually keep and can continue to grow. Below, we cover what capital gains are, which assets they apply to, how they’re taxed, and special considerations doctors should be aware of.
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What are capital gains?
Capital gains are the profits you make when you sell certain types of assets (capital assets) for more than you originally paid for them. There are two types of capital gains: short-term and long-term capital gains, which we cover below.
The IRS taxes capital gains in certain situations, typically when assets are sold. Both short-term and long-term capital gains must be reported on your annual income tax return, but the taxes owed on capital gains depends on the type.
Short-term vs long-term capital gains
Capital gains fall into two categories:
Short-term capital gains: gains on assets you held for one year or less before you sold them
Long-term capital gains: gains on assets you held for more than a year before you sold them
While this distinction in length of ownership might feel a bit arbitrary, it’s important because short-term and long-term capital gains are taxed at significantly different rates. How long you hold onto a capital asset may play an important role in determining when you want to sell off certain assets, especially if they have high capital gains that would result in a large tax bill.
What assets are taxed as capital gains?
Capital assets is a very broad term and includes most investments and valuable tangible assets.
Assets that can produce capital gains include, but aren’t limited to:
Real estate, such as your primary residence, investment properties & land
Investments, such as stocks, bonds, mutual funds, ETFs
Cryptocurrencies and NFTs
Vehicles, such as cars and boats
Collectibles, such as gems, jewelry, artwork, and coins
Business interests, such as ownership in partnerships or private practices
Capital gains are not taxed on earnings such as wages, interest income, and ordinary dividends. These are taxed as ordinary income. You can learn about income taxes on ordinary income separately in our guide to understanding taxes.
How are capital gains taxed?
Capital gains are usually “realized” and taxed when the asset is sold or ownership transfers.
Unrealized gains (paper gains) are when assets have increased in value, but you are still holding onto the asset. Taxes are not due on unrealized gains. If, for example, you purchase 100 shares of a stock for $10/share and the stock increases in value to $15/share at the end of the year but you keep all 100 shares, this gain in value is unrealized and will not generate a tax bill.
Exception: if your assets are held within a tax-advantaged retirement account, your capital gains taxes may be deferred or gains on capital assets sold may not trigger a taxable event. For example:
Capital assets in Roth accounts grow tax free, so capital gains taxes would not be owed on capital assets sold within these accounts
Capital assets in traditional accounts grow tax deferred, so capital gains taxes aren’t realized until you withdraw funds from the account, even if you buy and sell assets within the account in the meantime
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What is my short-term capital gains tax rate?
Short-term capital gains are taxed as ordinary income at the same rates as W-2 earnings, such as from your clinical job. Tax rates are based on your tax filing status and adjusted gross income (AGI). Learn more about calculating your taxable income to determine your ordinary income tax rate.
For tax year 2025 (returns filed in 2025) the tax rates by taxable income are:
Marginal tax rate | Single | Married filing jointly |
10% | $0 - $11,925 | $0 - $23,850 |
12% | $11,926 – $48,475 | $23,851 - $96,950 |
22% | $48,476 - $103,350 | $96,951 - $206,700 |
24% | $103,351 - $197,300 | $206,701 - $394,600 |
32% | $197,301 – $250,525 | $394,601 - $501,050 |
35% | $250,526 - $626,350 | $501,051 - $751,600 |
37% | $626,351 and above | $751,601 and above |
Because of this, short-term capital gains don’t offer as many tax advantages as long-term gains, and physicians may wish to work with their financial advisors on a plan to strategically hold certain assets subject to short-term capital gains until they qualify for long-term status after a year.
Note that this is not always possible, as individual assets within an asset you own, such as a mutual fund or ETF, may still be sold by the asset manager and trigger capital gains.
What is my long-term capital gains tax rate?
Long-term capital gains are taxed at lower rates than ordinary income tax rates.
As of 2025, the capital gains tax rates by taxable income are:
Capital gains rate | Single | Married filing jointly |
0% | $0 - $48,350 | $0 - $96,700 |
15% | $48,351 - $533,400 | $96,701 - $600,050 |
20% | $533,401+ | $600,051+ |
There are a few exceptions where long-term capital gains are taxed at a higher rate, including:
Selling collectibles, such as coins or art, which can be taxed at rates up to 28%
Some qualified small business stocks may be taxed at rates up to 28%
Some depreciable real property (section 1250 properties) may be taxed at rates up to 25%
Capital gains taxes considerations physicians should know
When looking at capital gains and related taxation, there are a few additional terms and situations physicians should be aware of:
Capital losses: While capital gains are when you sell assets for a profit, capital losses are when you sell an asset for less than what you paid for it. Capital losses are taxed following the same short-term and long-term taxation outlined above. Capital losses can offset up to $3,000 of ordinary income annually (such as from your W2 job as a physician).
Tax loss harvesting: Offsetting capital gains with capital losses can help reduce your overall capital gains tax burden. This strategy can get a little complicated and comes with caveats such as the “wash sale rule,” so we’ve covered it separately in our guide to how tax loss harvesting works.
Exercising stock options: When you exercise stock options, such as stock in a startup you received as part of your physician startup advisor side gig, and sell the stock for a profit, you’ll likely owe capital gains taxes. These will be taxed at either short-term or long-term capital gains tax rates, depending on how long you’ve held the stock. Learn more about this in our article on Non Qualified Stock Options (NSOs).
Capital gains exclusions on primary residences: Capital gains on your primary residence can qualify for an exclusion on taxation if you’ve lived in the home for at least two of the past five years. As of 2025, this exclusion is up to $250,000 for individuals and $500,000 for married couples. (Note: these are the capital gains amounts, not the home’s selling value.)
1031 exchanges to limit taxes: A 1031 exchange on an investment property can allow you to defer your capital gains taxes if you plan on spending the proceeds on investing into a similar, “like kind” property within a few months. Learn more about 1031 exchanges and how they work for taxes.
Conclusion
Short-term vs long-term capital gains have different rules for taxation. For high-income earners such as physicians, the difference between tax rates can be significant. By understanding how different assets, including investments, are taxed, physicians can strategically structure and optimize their investments and retirement planning. A comprehensive investment plan can help reduce overall taxes, which can lead to higher compounding growth of wealth over time.
If you need help assessing your investment strategy, a financial advisor who works with physicians can review your current portfolio and investing strategy to develop a comprehensive financial plan.
Some robo-advisor options also take into consideration capital gains taxes and tax loss harvesting, though not all options may offer this level of tax planning strategies.
Additional tax & investment resources for physicians
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