Which statement about capital gains holding periods is correct?

• A. Short-term gains are taxed at ordinary income rates for assets held less than a year; long-term gains taxed at reduced rates.
• B. Short-term gains are tax-free; long-term gains taxed at ordinary rates.
• C. All gains are taxed the same regardless of holding period.
• D. Long-term gains are taxed at higher rates than short-term gains.

Answer: (A)

Capital gains taxes depend on how long you hold an asset. If you sell an asset you've owned for less than a year, the gain is taxed at ordinary income rates—the same rates you pay on wages. If you’ve held it for more than a year, the gain is taxed at reduced long-term rates, which are typically lower than ordinary income rates to encourage longer-term investing. This is why the correct statement matches reality: short-term gains follow ordinary rates, long-term gains receive favorable, reduced rates. For example, a sale after 9 months would be taxed at your current ordinary bracket, while a sale after more than a year would be taxed at a long-term rate that is usually 0%, 15%, or 20% depending on income. The other options either claim gains are tax-free, imply the same tax regardless of holding period, or state that long-term gains are taxed higher, all of which contradict how capital gains are actually treated.