How are capital gains assessed for tax purposes?

Capital gains are taxed based on the investment duration, which is why this answer is accurate. The Internal Revenue Service (IRS) distinguishes between short-term and long-term capital gains when it comes to taxation. Short-term capital gains, which arise from assets held for one year or less, are taxed at ordinary income tax rates. In contrast, long-term capital gains, resulting from assets held for more than one year, benefit from preferential tax rates that are typically lower than ordinary income rates.

This distinction is significant because it encourages longer-term investment strategies by providing a tax incentive for holding assets rather than selling them quickly. Therefore, the duration for which the investment is held plays a critical role in determining the applicable tax rate, directly affecting the tax burden for the individual or entity realizing the gain.