Question

Short note on long term and short term capital gains

Answer 1

Capital Gains and Losses: Short-Term and Long-Term



Long-Term Capital Gains vs. Short-Term Capital Gains

The rate of tax charged on a capital gain depends upon whether it was a long-term capital gain (LTCG) or a short-term capital gain (STCG). If the asset in question was held for one year or less, it’s a short-term capital gain. If the asset was held for greater than one year, it’s a long-term capital gain.

STCGs are taxed at normal income tax rates. In contrast, LTCGs, are taxed at the same rates as qualified dividend income.

That is, for 2018, LTCGs are taxed at a 0% rate if they fall below $38,600 of taxable income ($77,200 if you’re married filing jointly). They are taxed at a 15% rate if they fall above the 0% threshold but below $425,800 ($479,000 if married filing jointly). And they are taxed at a 20% rate if they fall above the 15% threshold.

An important takeaway here is that if you’re ever considering selling an investment that has increased in value, it might be a good idea to think about holding the asset long enough for the capital gain to be considered long-term.

Note that a capital gain occurs only when the asset is sold. This is important because it means that fluctuations in the value of the asset are not considered taxable events.


Taxation of Mutual Funds

Mutual funds are collections of a very large quantity of other investments. For instance, a mutual fund may own thousands of different stocks as well as any number of other investments like bonds or options contracts.

Each year, each mutual fund is responsible for income tax on her share of the net capital gains realized by the fund over the course of the year. (Each shareholder’s portion of the gains will be reported to her annually on Form 1099-DIV sent by the brokerage firm or fund company.)

What makes the situation counterintuitive is that, in any given year, the capital gains realized by the fund can vary (sometimes significantly) from the actual change in value of the shares of the fund.


Capital Gains from Selling Your Home

Selling a home that you’ve owned for many years can result in a very large long-term capital gain. Fortunately, it’s likely that you can exclude (that is, not pay tax on) a large portion — or even all — of that gain.

If you meet three requirements, you’re allowed to exclude up to $250,000 of gain. The three requirements are as follows:

For the two years prior to the date of sale, you did not exclude gain from the sale of another home.During the five years prior to the date of sale, you owned the home for at least two years.During the five years prior to the date of sale, you lived in the home as your main home for at least two years.

To meet the second and third requirements, the two-year time periods do not necessarily have to be made up of 24 consecutive months.

For married couples filing jointly, a $500,000 maximum exclusion is available if both spouses meet the first and third requirements and at least one spouse meets the second requirement.

Capital Losses

Of course, things don’t always go exactly as planned. When you sell something for less than you paid for it, you incur what is known as a capital loss. Like capital gains, capital losses are characterized as either short-term or long-term, based on whether the holding period of the asset was greater than or less than one year.

Each year, you add up all of your short-term capital losses, and deduct them from your short-term capital gains. Then you add up all of your long-term capital losses and deduct them from your long-term capital gains. If the end result is a positive LTCG and a positive STCG, the LTCG will be taxed at a maximum rate of 20%, and the STCG will be taxed at ordinary income tax rates. If the end result is a net capital loss, you can deduct up to $3,000 of it from your ordinary income. The remainder of the capital loss can be carried forward to deduct in future years.

Simple Summary

If an asset is held for one year or less, then sold for a gain, the short-term capital gain will be taxed at ordinary income tax rates.If an asset is held for more than one year, then sold for a gain, the long-term capital gain will be taxed at a maximum rate of 20%.If you have a net capital loss for the year, you can subtract up to $3,000 of that loss from your ordinary income. The remainder of the loss can be carried forward to offset income in future years.Mutual fund shareholders have to pay taxes each year as a result of the net gains incurred by the fund. This is unique in that taxes have to be paid before the asset (i.e., the mutual fund) is sold.If you sell your home for a gain, and you meet certain requirements, you may be eligible to exclude up to $250,000 of the gain ($500,000 if married filing jointly).