Ordinary Income vs Capital Gains — Overview

Ordinary income is taxed at graduated rates from 10% to 37% Long-term capital gains receive preferential rates of 0%, 15%, or 20% The holding period — more or less than one year — determines the treatment Strategic timing of asset sales can shift income from ordinary to capital gains rates

Hold appreciated assets beyond one year to convert short-term to long-term gains Harvest losses in down markets to offset current or future capital gains Use tax-lot identification to sell highest-basis shares and minimize gains Consider qualified opportunity zone investments to defer and reduce capital gains The one-year holding period is the dividing line between ordinary and capital rates

Ordinary Income vs Capital Gains

Types of Ordinary Income and Capital Gains

Ordinary: wages, salaries, bonuses, self-employment, interest, short-term gains
Capital gains come from selling assets like stocks, bonds, or real estate
Long-term treatment requires holding the asset for more than one year
Inherited assets receive a stepped-up basis, potentially eliminating the gain

2025 Tax Rate Comparison

Ordinary rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37% brackets
Long-term capital gains: 0% up to $47,025 single / $94,050 MFJ
15% rate applies up to $518,900 single / $583,750 MFJ
20% rate applies above those thresholds — plus potential 3.8% NIIT

Netting Rules for Gains and Losses

Short-term gains and losses are netted against each other first
Long-term gains and losses are netted against each other separately
Net short-term losses offset net long-term gains and vice versa
The character of the remaining net gain determines the applicable tax rate

Capital Loss Deduction and Carryforward

Net capital losses can offset up to $3,000 of ordinary income per year
Excess losses carry forward indefinitely to future tax years
Carried-forward losses retain their short-term or long-term character
The wash sale rule disallows losses if you repurchase the same security within 30 days

Special Rates — Collectibles and Recapture

Collectibles like art, coins, and antiques are taxed at a maximum 28% rate
Section 1250 depreciation recapture on real estate is taxed at up to 25%
Qualified small business stock (Section 1202) may exclude up to 100% of gain
Installment sales can spread gain recognition across multiple tax years

Planning Strategies

Hold appreciated assets beyond one year to convert short-term to long-term gains
Harvest losses in down markets to offset current or future capital gains
Use tax-lot identification to sell highest-basis shares and minimize gains
Consider qualified opportunity zone investments to defer and reduce capital gains
The one-year holding period is the dividing line between ordinary and capital rates