What Is a Long-Term Capital Gain or Loss?
A long-term capital gain or loss arises from the sale of an investment you’ve held for over 12 months. These transactions receive more favorable tax treatment compared to short-term gains, stemming from investments held for under a year.
Key Takeaways
- Long-term capital gains or losses apply to investments held for over 12 months.
- Long-term capital gains benefit from lower tax rates compared to short-term gains.
- Long-term losses can offset future capital gains.
- For the tax years 2023 and 2024, the long-term capital gains tax ranges from 0% to 20%, based on your tax bracket.
Understanding Long-Term Capital Gain or Loss
The value of a long-term capital gain or loss is the difference between the sale price and the purchase price of the asset. Short-term capital gains or losses, on the other hand, are realized from assets held for less than a year. The Internal Revenue Service (IRS) encourages holding assets long-term by taxing long-term gains at lower rates—ranging from 0% to 20% for the tax years 2023 and 2024.
Capital losses, both short-term and long-term, are handled similarly. For instance, if you have two stocks—one held for over a year and another for less—you can combine the gains and losses for a net calculation. You can subsequently deduct up to $3,000 of these losses annually from your tax returns, with the possibility to carry over any excess losses to subsequent years.
Examples of Long-Term Capital Gains and Losses
Imagine Mellie Grant is filing taxes, with a long-term capital gain from the sale of TechNet Limited shares. Purchased at $175,000 and sold for $220,000, Mellie recognizes a long-term gain of $45,000, subject to long-term capital gains tax.
Conversely, Mellie also sells a vacation home bought less than a year ago at $80,000 and sold at $82,000, accruing a $2,000 short-term gain taxable as income. Had she sold it at $78,000, the $2,000 short-term loss could offset her expenses on the $45,000 gain.
Deducting Long-Term Capital Losses
The IRS permits deducting capital losses and carrying them over to subsequent years. However, you can only claim up to $3,000 ($1,500 if filing separately) per year, or the full net loss, whichever is smaller.
Is There a Limit on Long-Term Capital Losses?
While there’s no limit to how much you can incur in losses, tax deduction claims are capped at $3,000 yearly. Beyond that, you can carry any remaining losses forward into future years.
Does the IRS Track Capital Loss Carryover?
Indeed, the IRS lets you deduct up to $3,000 in capital losses yearly, rolling over extra losses into subsequent years. With a $9,000 capital loss, for example, you’d deduct $3,000 each year over three years, reducing your taxable income accordingly.
The Bottom Line
Long-term capital gains and losses occur from selling investments held for over a year, providing tax benefits through reduced tax rates on gains. Additionally, capital losses up to $3,000 may be deducted and can be carried forward into future tax years till fully claimed.
Related Terms: capital loss, short-term capital gain, tax return, IRS, investment income.
References
- Internal Revenue Service. “Topic No. 409, Capital Gains and Losses”.
- Internal Revenue Service. “Publication 550, Investment Income and Expenses”, Page 66.
- Internal Revenue Service. “Topic No. 701, Sale of Your Home”.
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is a long-term capital gain?
- [x] A capital gain on an asset held for more than a year
- [ ] A capital gain on an asset held for less than a year
- [ ] A capital gain realized within a year’s time
- [ ] A capital loss on any asset
## How is a long-term capital gain taxed differently from a short-term capital gain in the United States?
- [ ] At the taxpayer’s ordinary income tax rate
- [x] Usually at a lower rate than short-term capital gains
- [ ] Normally not taxed at all
- [ ] At a higher rate than short-term capital gains
## Which type of asset can result in a long-term capital gain?
- [ ] Cash savings in a bank
- [ ] Short-term investment in stocks
- [x] Real estate held for more than a year
- [ ] Royalties received from intellectual property
## What qualifies a loss to be categorized as a long-term capital loss?
- [x] Loss incurred on an asset held for more than a year
- [ ] Loss incurred on an asset held for less than a year
- [ ] Losses deductible only against short-term gains
- [ ] Any loss deducted from annual income
## Which of the following would be an example of a long-term capital gain?
- [ ] Selling a stock held for six months at a profit
- [x] Selling an investment property after five years at a gain
- [ ] Flipping a house within four months for a profit
- [ ] Selling a car at a price higher than bought within one year
## At what tax rate are long-term capital gains generally taxed in the United States?
- [x] Preferred long-term capital gains rates (different from ordinary income tax rate)
- [ ] At the taxpayer’s highest marginal ordinary income tax rate
- [ ] At a special, higher hedging rate
- [ ] Lower, reduced fiduciary tax rate only
## If you sold an asset, under which condition will it NOT be considered a long-term capital gain or loss?
- [ ] If held for over a year
- [ ] Sold at a profit but held around eighteen months
- [x] Sold after the asset was held for less than six months
- [ ] Realized gains inherently untaxable
## Which statement accurately differentiates short-term and long-term capital outlay on property investments?
- [ ] Long-term gains/losses accrue from sales clarified within short fiscal periods.
- [ ] All property-related returns are treated as regular income, irrepective of duration held.
- [x] Gains/losses from property held beyond a predefined duration (yearly basis commonly) referred to as long-term.
- [ ] Broad regulatory context specifies all property dealings exempt from gain categorizations.
## In which scenario will a capital gain qualify as long-term?
- [x] If the asset is owned for more than 365 days prior to sale
- [ ] If the asset is processed as widget export spanning calendar leap year inclusions traded
- [ ] On an asset retained over initial half-year continuous monitoring process
- [ ] Through twelve months accelerated flip to differently taxed bracket pre-cyclic liquidation stacks
## How do long-term capital gains impact individual income tax filing?
- [ ] They are aggregated within earned interest and tax similarly like primary salary.
- [ ] Ignored under basic asset depreciation rules in taxpayer's formula.
- [ ] Mainly uninsured against pertinent AMT exclusions.
- [x] Calculated separately and potentially benefiting from differentiated, spaced tax treatment lower than standard income levels.
