What distinguishes long-term capital gains from short-term capital gains?

Long-term capital gains are distinguished from short-term capital gains primarily by the duration for which the asset is held before its sale. If an asset is held for more than a year before being sold, any profit earned from that sale is considered a long-term capital gain. Long-term capital gains benefit from a preferential tax rate, which is generally lower than the rate applied to ordinary income, making them an advantageous outcome for taxpayers. This preferential treatment aims to encourage long-term investment rather than short-term speculation.

On the other hand, short-term capital gains arise from the sale of assets held for one year or less and are taxed at ordinary income rates, which tend to be higher. This creates a significant incentive to hold investments longer, fostering stability in the market.

The other choices do not accurately capture the distinctions between these two types of gains. Long-term gains are not associated with a holding period of less than a year, nor are short-term gains exempt from taxation, which highlights the unique characteristics that differentiate long-term from short-term capital gains.