What is a long-term capital gain or loss?
A long-term capital gain or loss is the gain or loss from the sale of an eligible investment held for more than 12 months at the time of sale. This can be contrasted with short-term gains or losses on investments that are sold in less than 12 months. Long-term capital gains often receive more favorable tax treatment than short-term gains.
Understanding the long-term capital gain or loss
The long-term capital gain or loss is determined by the difference in value between the sale price and the purchase price. This figure corresponds to the net profit or net loss that the investor has suffered from the sale of the asset. Short-term capital gains or losses are determined by the net income an investor has suffered from the sale of an asset held for less than 12 months. The Internal Revenue Service (IRS) assigns a lower tax rate to long-term capital gains than to short-term capital gains.
A taxpayer will have to report the total of his capital gains earned for the year when filing his annual tax return, as the IRS will treat these short-term capital gains as taxable income. Long-term capital gains are taxed at a lower rate, which in 2019 ranged from 0 to 20%, depending on the tax bracket in which the taxpayer is located.
For capital gains losses, short-term and long-term losses are treated the same. Taxpayers can claim these losses against any long-term gain they may have made during the production period. These figures are all reported on tax form 1040.
Key points to remember
- Long-term capital gains or losses apply to the sale of an investment made after owning it for 12 months or more.
- Long-term capital gains are often taxed at a more favorable tax rate than short-term gains.
- Long term losses can be used to offset future long term gains.
- In 2019, the long-term capital gains tax amounted to 0% -20% depending on each person’s tax bracket.
Examples of long-term capital gains and losses
For example, imagine that Mellie Grant files her taxes and has a long-term capital gain on the sale of her shares for TechNet Limited. Mellie first purchased these shares in 2005 during the initial offer period for $ 175,000 and is now selling them in 2019 for $ 220,000. It has a long-term capital gain of $ 45,000, which will then be subject to capital gains tax.
Now suppose she also sells her vacation home she bought in 2020 for $ 80,000. She hasn’t owned the property for a very long time, so she hasn’t raised a lot of equity there. When she sold it a few months later, she only received $ 82,000. This presents him with a short-term capital gain of $ 2,000. Unlike the sale of his long-standing shares, this profit will be taxed as income and will add $ 2,000 to his existing salary calculation.
If Mellie had sold her vacation home for $ 78,000 instead, suffering a short-term loss, she could have used that $ 2,000 to offset part of her tax payable for the $ 45,000 long-term capital gains. that she had suffered.