DEFINITION of 'Capital Gains Treatment'

Capital gains treatment are specific taxes assessed on investment capital gains as determined by the U.S. Tax Code. When a stock is sold for a profit, the portion of the proceeds over and above the purchase value (or cost basis) is known as capital gains. Capital gains tax is broken down into two categories: short-term capital gains and long-term capital gains. Stocks held longer than one year are considered long term for the treatment of any capital gains, and are taxed a maximum of 15% depending on the investor's tax bracket. Stocks held less than one year are subject to short-term capital gains at a maximum rate of 35% depending again on the investor's tax bracket.

BREAKING DOWN 'Capital Gains Treatment'

The huge difference between the short-term and long-term rates makes it clear that paying close attention to the tax consequences of investing in stocks is a critical skill to develop. As an investor's portfolio grows, he or she should increasingly keep track of capital gains, including making adjustments near the end of the calendar year to reduce capital gains taxes as much as possible. An accountant or investment professional can assist in these efforts.

How the Holding Period Can Affect the Capital Gains Treatment

The holding period for a stock, the time frame it is owned, typically begins from the day the stock is held by the investor regardless of how long any warrants or options awaited to be exercised. In many instances, the stock is held at least one year and a day in order to receive the preferred long-term capital gains treatment. There may be instances, such as if the stock is expected to decline deeply, where it can be more advantageous to investors to sell those shares and pay the higher capital gains tax rate rather than face even deeper losses.

There are cases where the holding period to receive long-term rates follow different rules. For example, if an individual were to inherit stock or other applicable assets, they would automatically receive the preferred long-term rate. If an employee is granted an incentive stock option, they must wait at least two years from the date the options were issued and at least one year from when the option was exercised and the stock came into their possession. When stock is gifted to another person, the time the shares spent in the possession of the person granting the stock would be included in the overall holding period.

RELATED TERMS
  1. Capital Gains Tax

    A capital gains tax is a tax for capital gains incurred by individuals ...
  2. Long-Term Capital Gain or Loss

    A gain or loss from a qualifying investment owned for longer ...
  3. Short-Term Gain

    A short-term gain is a capital gain realized by the sale or exchange ...
  4. Incentive Stock Option - ISO

    An incentive stock option (ISO) is a type of employee stock option ...
  5. Capital Gains Distribution

    Capital gains distribution occurs when a mutual fund manager ...
  6. Return Of Capital

    A return from an investment that is not considered income. The ...
Related Articles
  1. Taxes

    Comparing Long-Term vs. Short-Term Capital Gains Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  2. Taxes

    How Are Futures & Options Taxed?

    We present a basic introduction to the US tax processes of futures and options.
  3. Taxes

    Capital Gains Tax Cuts For Middle Income Investors

    Find out how TIPRA plans to slash taxes for those in the 10-15% tax bracket.
  4. Taxes

    Reducing Capital Gains Tax on Investment Property

    The 1031 exchange rules can help reduce or eliminate property gains taxes on investment property.
  5. Investing

    How Tax-Efficient Is Your Mutual Fund?

    Learn about factors that influence the tax-efficiency of your mutual fund, how income from your investment is taxed and what to look for when choosing a fund.
  6. Taxes

    How Are Stock Options Taxed & Reported?

    That depends on the type of stock option you have. A rundown of the tax treatment for statutory and nonstatutory, or non-qualified, options.
  7. Financial Advisor

    Income tax on mutual funds: The basics

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  8. Taxes

    Year-End Tax Planning That Will Boost Your Returns

    Year-end tax planning is crucial to take advantage of strategies to maximize after-tax returns on your investments.
  9. Taxes

    10 Tax Tips For Stock Options

    Options and restricted stock are a great perk--if you don't get caught in a tax trap. Here's what you need to know.
RELATED FAQS
  1. How are capital gains and dividends taxed differently?

    The U.S. tax code gives similar treatment to ordinary dividends and short-term capital gains, and qualified dividends and ... Read Answer >>
  2. Is there a difference between capital gains and dividend income?

    Selling something for a profit leads to capital gains. A payment made by a corporations to stockholders is a dividend. Both ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center