Short-term vs long-term rates
| Holding period | Tax rate | |---|---| | Less than 1 year | Ordinary income (10%–37%) | | More than 1 year | 0%, 15%, or 20% (based on income) |
For most retirees in the 12–22% bracket, long-term capital gains are taxed at 15%. This is the same rate as qualified dividends — making the tax treatment of long-term stock appreciation and qualified dividend income equivalent.
Capital gains and buy-and-hold dividend investing
One underappreciated feature of buy-and-hold dividend investing: capital gains are deferred indefinitely until you sell. A position purchased at $40 and now worth $120 has $80 in unrealized capital gains. That appreciation has compounded without generating a single year of capital gains taxes.
When you eventually do sell — or if you pass the position to heirs (who receive a stepped-up cost basis) — the timing and size of the gain is within your control in ways that annual dividend taxes are not.
Using capital gains strategically in retirement
Some retirees deliberately harvest capital losses to offset gains, or time sales to stay within the 0% long-term capital gains bracket. At modest income levels, you may be able to realize significant long-term capital gains tax-free — a meaningful planning opportunity.
Related terms
- Cost basis — what you paid; determines taxable gain when you sell
- Tax-advantaged account — where capital gains are deferred or eliminated
- Total return — dividends plus capital gains equals total investment return