Posted by Carmen Garcia

Understanding Long-Term Capital Gains From a Taxpayer's Perspective

Understanding Long-Term Capital Gains From a Taxpayer's Perspective

According to the IRS, tax rates will depend on the taxpayer's source of income. Your income from the sale of stocks, for example, will generally be taxed at a lower rate than your salary or wages, but that does not mean that investment income is treated the same. Understanding the difference between short-term and long-term capital gains tax is important to ensure you get more benefits than paying higher costs. Since both capital gains will have a huge impact on your tax rate, it's imperative to understand the difference between them.


What are long-term capital gains?

Long-term capital gains are assets held for more than 12 months. If you can keep your assets for that long, you can benefit from a lower tax rate. Due to the substantial reduction in long-term capital gains tax rates, individuals and corporations have been encouraged to hold their investments for an extended period. There is a 20% difference in the rate between the long-term capital gains rate and the short-term capital gains rate.


What are the long-term capital gains tax rates?

For instance, for the year 2015, people in the 10-15% income tax category had a 0% capital gain rate. This means that if you earn less than the said bracket, you no longer have to pay tax on investment income held for more than 12 months.

On the other hand, those of 25 to 35% will have a capital gains tax of 15%. For wealthy citizens who have an income tax of 39.6%, the capital gain rate will remain at 20%. You can ask a tax professional to provide you with a detailed calculation of tax rates based on different tax brackets for a better understanding.


What are short-term capital gains?

Two things differentiate short-term capital gains from long-term gains. First, they are assets that have been held for less than a year, and second, they do not benefit from special tax rates. They are taxed at the same rate as your normal income. If you decide to sell the business you own for less than a year or less, the profit you make will be considered a short-term capital gain. Make sure to count from the day you bought the asset until the day it was sold.


What is the tax rate for short-term capital gains?

As short-term capital gains are taxed as ordinary income, their tax rates vary, which will also be based on total taxable income. Taxpayers who file as individuals will be under the 25% tax bracket. However, certain tax deductions or credits will continue to apply if your records indicate that you are eligible for these benefits.


Can I still benefit from my capital losses?

As a taxpayer, you need to know the benefits you can get if you lose money on your investment. Even if you don't generate capital gains, you can use those losses to reduce taxes. You can calculate your total gain or loss in any year, and if it results in a loss, you can use up to $3,000 per year to reduce your taxable income. If there are additional losses, you can carry them forward to subsequent years.


What is the difference between short and long-term losses?

Short-term capital gains and short-term capital losses are assets that have been held for less than a year. However, from the taxpayer's point of view, short and long-term losses are treated the same. They can also deduct short-term capital losses from their long-term capital gains. If you are an investor who has short and long-term gains and losses, you need to offset the long-term gains and losses against each other. You should do the same for short-term gains and losses. Long-term net income will be offset by short-term net income. Whatever the final net number is, it will be entered on Form 1040.


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Carmen Garcia
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