How are short-term capital gains taxed differently from long-term capital gains?

Short-term capital gains are indeed taxed differently compared to long-term capital gains, and the correct answer highlights one of the key distinctions. Short-term capital gains arise from the sale of assets held for one year or less and are taxed as ordinary income. This means that the gains are subject to the individual's tax bracket, which can be significantly higher than the rates applicable to long-term gains.

Long-term capital gains, which are derived from the sale of assets held for more than one year, benefit from preferential tax treatment. These gains are typically taxed at lower rates than ordinary income, often categorized under specific tax rates that can range from 0% to 20%, depending on the taxpayer's overall income.

The incorrect options present various misunderstandings:

• Saying short-term gains are taxed at a lower rate is inaccurate because they align with ordinary income rates, which can actually be higher than capital gains rates.

• The assertion that long-term gains are taxed entirely tax-free is misleading; while they may enjoy lower tax rates, they are not exempt from taxes entirely under normal circumstances.

• Claiming that long-term gains are taxed as corporate profits does not apply because long-term capital gains for individuals are treated differently than corporate profits, which are subjected to corporate income tax rates