Why do long-term capital gains get taxed at preferential rates?

Some policymakers take issue with long-term capital gains being taxed at a preferential rate compared to income from paid work

The concept of taxing unrealized capital gains—when an asset’s value increases but has yet to be sold—has been increasingly debated. Other policymakers in recent years have supported lowering the highest long-term capital gains tax rate and are generally opposed to levying taxes on unrealized capital gains.

Capital gains taxes were first levied in the US in 1913

However, up until 1921, they were treated the same as ordinary income. Ever since then, rates have swung up and down.

Long- and short-term capital gains have different tax implications

Short-term gains (assets held for one year or less) are taxed like regular income, at rates up to 37%. Meanwhile, long-term gains (assets held over a year) are capped at 20%, offering significant savings for high earners.

Short-term capital gains are gains on sales made in less than a year

In 2024, a single filer making anywhere between $200,001 and $243,725 per year would pay a 15% tax on long-term capital gains. But when it comes to short-term capital gains, they’d be taxed at the same rate as their regular income, which, in their case, is 32%.

Study up on capital gains basics

Common capital gains tax tips include making sure you have money set aside for your capital gains tax burden and considering making estimated payments throughout the year.

The 16th Amendment paved the way for capital gains taxes

Ratified in 1913, the 16th Amendment paved the way for a far-reaching federal income tax and supercharged the country’s coffers. Before then, the US depended on import tariffs and so-called consumption taxes to raise revenue.

ETFs and mutual funds are both taxed on capital gains and on dividends

Many experts consider ETFs to be more tax-efficient—ETFs are less likely to trigger capital gains taxes that must be passed on to the fund holder.

The highest 2024 federal income tax bracket covered income upward of $731,201 for married couples filing jointly

To understand what you would owe on short-term capital gains and to visualize the favorability of long-term tax rates, you need to know how your traditional income is taxed at the federal level. A breakdown explores the different brackets for 2024, separated by filing status.

How income taxes evolved from a funding tool for war into a crucial revenue source for the federal government

Americans have long resisted income taxes. So, how did they become permanent? This overview explains how wartime funding needs, constitutional changes, and economic shifts gave rise to the modern tax system, from the Civil War to the payroll withholding rules we follow today.

Warren Buffett paid a lower effective tax rate than his secretary

While wages and salaries are taxed progressively at rates up to 37%, long-term investments are taxed at lower rates: 0%, 15%, or 20%. For wealthy individuals like Buffett, whose income mainly comes from investments, this means paying a lower effective tax rate than someone earning a salary.

Understanding the low corporate tax rate in the US

Corporate taxes, which make up roughly a third of the federal government's revenue, have been calculated using a flat 21% rate since the Tax Cuts & Jobs Act of 2017. The current rate is considered low both by historic standards (it averaged over 50% in the 1950s and 1960s) and compared to other countries.

The debate over estate taxes centers on wealth inequality

Since the modern federal estate tax was implemented, people have felt strongly about whether or not to keep it. Much of the debate boils down to equality: Proponents say the tax creates better income equality between the rich and poor, while opponents say it's an inequitable tax only placed on the wealthy.

See comparisons of different countries' taxation strategies

Taxes are a major revenue source for most countries, and how each government taxes citizens often reflects the country's economy. Developed countries tax at much higher rates than developing ones, and as a country grows its GDP, it also typically grows the proportional percentage of taxes it gains from its citizens.

Reinvested dividends are not a way to dodge paying capital gains taxes

When an investor holds stock in a company that pays a dividend—a portion of its profits directly returned to shareholders as monthly or quarterly payments—they can choose to hold that dividend in cash, spend it, or reinvest it into more shares of that company’s stock.

In 1931-32, JP Morgan Jr. paid no income taxes due to his company’s losses

This legally reduced his taxable income under existing laws. Similarly, the Rockefellers leveraged charitable foundations to minimize taxes, allowing them to preserve wealth while directing funds to their preferred causes.

HSAs are frequently criticized for exacerbating inequality in healthcare access

Health savings accounts offer large tax advantages, but require personal contributions. Some argue that the tax advantages benefit wealthy individuals more than anyone else and that HSAs don't do much to help people who can't afford to regularly contribute to one. As a result, HSAs only decrease costs for those who can comfortably invest in them, and health inequalities between high-income and low-income individuals are exacerbated.

A rising number of Social Security beneficiaries are taxed on their Social Security income

That’s because while Social Security benefits increase with wages and inflation, the income limits for taxing those benefits stay the same and don’t adjust over time.

Hedge funds, the private investment firms that trade a wide swath of financial assets, make money by imposing steep fees on investors and from the fund's investment performance.

Visualizing 40 years of interest rates

The history of interest rates are a proxy of macroeconomic conditions, with higher interest rates indicating periods of decline requiring artificial central stimulation. In a series of charts illustrating rates and their background conditions, you can see the movement of the economy over a forty-year period ending in 2020. Dive into the data here.

Carried interest is a share of the profits that a venture capital firm’s general partners earn

Also known as "carry" for short, carried interest is roughly 20% of a fund’s returns, but the exact percentage varies between firms.

Eleven of modern history's greatest investors

The greatest investors have all made a fortune off of their success and, in many cases, have helped millions of others achieve similar returns. Read about the lives and approaches of Carl Icahn, Warren Buffett, George Soros, and more.

A 'position' in financial markets refers to the amount of a security or asset that an investor owns or sells short

A "long" position gains from an increase in a security's price, whereas a "short" position profits from a price drop. This article includes a detailed explanation of the term "position" as it relates to investing and financial markets.

While the first exchange-traded fund (a 'basket' of different assets that can be bought and sold on a stock exchange) in the US only launched in 1993, the global ETF market has grown to more than $10T in the short time since.

Behind the scenes on tariff politics

Economist Gene Grossman joined the Trade Talks Podcast to discuss why tariffs really happen. The episode digs into how voters, politicians, lobbyists, and even campaign cash can affect when protectionist trade policies are put forward. Produced in 2019, the podcast also discusses how populist trade policies and identity politics accounted for Donald Trump’s victory in the 2016 Presidential election.

Patents arguably grant inventors monopolies for a short period of time

As a way to reward innovation, the government grants short-term monopolies on patented products. Patents block other companies from producing or selling that product, giving inventors the rights and opportunity to establish themselves in a market before other competitors enter.

Series I bonds are a form of government savings bonds created to shield your investments from inflation

Specifically, I bonds earn interest from both a fixed rate and an inflation rate. This article explains who might benefit from investing in I Bonds—for instance, people seeking to invest savings they do not need to access in the near future.

Pension plans investing over 60% in stocks had the highest real returns in 2024

In order to ensure that retirees received all the retirement funds a company or other institution may have promised them, pensions were often limited to investing in run-of-the-mill assets like government securities, investment-grade bonds, and blue-chip stocks. But as market conditions have evolved, pensions are increasingly being invested in a wider range of assets, including alternative investments.

Despite being favored by 87% of Americans, Congress does not have term limits.

Warren Buffett's former professor Benjamin Graham is known as the 'father of value investing,' a strategy in which investors seek to buy stocks trading below their intrinsic worth.

Venture capital is a form of funding provided to early-stage companies with high growth potential, typically in exchange for an equity (or ownership) stake

Dozens of S&P 500 stocks, including Coca-Cola and Walmart—known as the dividend aristocrats—have increased dividends every year for 25 years

Calculate how much of your tax dollars go to each federal program based on your income, filing status, and number of children

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The US Constitution is widely regarded as the longest-standing written national constitution still in force—see how it has influenced rights worldwide.

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The word 'jazz' evolved from 'jasm,' 19th-century American slang for 'energy'

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Telehealth demand for GLP-1s for weight loss is booming as consumers seek easier access.

The most expensive ad of all time was for Chanel No. 5 perfume and cost roughly $33M to produce in 2004—about $57M in today's dollars.

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