Quick Answer
A gain or loss is short-term if held one year or less (taxed at ordinary rates up to 37%) and long-term if held more than one year (taxed at 0%, 15%, or 20%). Net losses offset gains dollar for dollar; up to $3,000 of excess loss offsets ordinary income yearly, and the rest carries forward indefinitely.
Every time you sell a security, the Internal Revenue Service (IRS) wants to know two things: did you make money, and how long did you hold it? Those two answers, combined with how many other trades you made that year, determine the actual tax bill.
How Do Short-Term and Long-Term Classifications Differ?
The dividing line is one year:
| Holding Period | Classification | Tax Rate |
|---|---|---|
| 1 year or less | Short-term capital gain/loss | Ordinary income rate (up to 37%) |
| More than 1 year (1 year + 1 day) | Long-term capital gain/loss | Preferential rate: 0%, 15%, or 20% |
- The holding period begins the day after purchase (trade date + 1) and includes the day of sale
- For Series 7 purposes, assume a 15% long-term capital gains rate unless the question states otherwise
- Short-term gains are taxed at the investor's ordinary income tax bracket: same rate as salary
Exam Tip: Gotchas
"More than one year" means 366 days minimum. If you buy on January 1 and sell on January 1 of the next year, that's exactly one year; still short-term. Holding until January 2 is required for long-term treatment.
How Do You Calculate Gains and Losses?
The math is straightforward:
- Capital gain = sale proceeds - adjusted cost basis
- Capital loss = adjusted cost basis - sale proceeds
The $3,000 Rule for Net Capital Losses:
- Capital losses first offset capital gains dollar for dollar (no limit)
- If losses exceed gains, you can deduct up to $3,000 of net capital losses against ordinary income per year ($1,500 if married filing separately)
- Unused capital losses carry forward indefinitely to future tax years; they never expire
Exam Tip: Gotchas
The $3,000 limit applies to NET capital losses (after offsetting all gains). Excess losses carry forward indefinitely; they do NOT expire.
What Should You Check on Exam Day?
- Classify by the one-year line: 1 year or less is short-term, more than 1 year (1 year + 1 day) is long-term
- Default to a 15% long-term rate unless the question states otherwise
- Remember the $3,000 net-loss deduction limit against ordinary income, and that unused losses carry forward indefinitely