Table of Contents
Table of Contents

Long-Term Capital Gains and Losses: Definition and Tax Treatment

What Is a Long-Term Capital Gain or Loss?

A long-term capital gain or loss is the gain or loss stemming from the sale of a qualifying investment that has been owned for longer than 12 months at the time of sale. This may be contrasted with short-term gains or losses on investments that are disposed of in less than 12 months time. Long-term capital gains are often given more favorable tax treatment than short-term gains.

Key Takeaways

  • Long-term capital gains or losses apply to the sale of an investment made after owning it 12 months or longer.
  • 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.
  • As of 2023, the long-term capital gains tax stands at 0%–20% depending on one's tax bracket.

Understanding Long-Term Capital Gain or Loss

The long-term capital gain or loss amount is determined by the difference in value between the sale price and the purchase price. This figure is either the net profit or loss that the investor experienced when selling the asset. Short-term capital gains or losses are determined by the net profit or loss an investor experienced when selling an asset that was owned for less than 12 months. The Internal Revenue Service (IRS) assigns a lower tax rate to long-term capital gains than short-term capital gains.

A taxpayer will need to report the total of their capital gains earned for the year when they file their annual tax returns because the IRS will treat these short-term capital gains earnings as taxable income. Long-term capital gains are taxed at a lower rate, which as of 2023 ranges from 0 to 20%, depending on the tax bracket that the taxpayer is in.

When it comes to capital gains losses, both short-term and long-term losses are treated the same. Taxpayers can claim these long-term losses against any long-term gains they may have experienced during the filing period. Short-term capital losses can also be used to offset short-term capital gains. These figures are all reported on tax Form 1040.

Examples of Long-Term Capital Gains and Losses

For example, imagine Mellie Grant is filing her taxes and she has a long-term capital gain from the sale of her shares of stock for TechNet Limited. Mellie first purchased these shares a few years ago during the initial offering period for $175,000 and sells them now for $220,000. She experiences a long-term capital gain of $45,000, which will then be subject to the capital gains tax.

Now assume she is also selling her vacation home that she purchased a year ago for $80,000. She has not owned the property for very long, so she has not gathered much equity in it. When she sells it only a few months later, she receives just $82,000. This presents her with a short-term capital gain of $2,000. Unlike the sale from her long-held shares of stock, this profit will be taxed as income, and it will add $2,000 onto her existing wage calculation.

If Mellie had instead sold her vacation home for $78,000, experiencing a short-term loss, she could have used that $2,000 to offset some of her tax liability for the $45,000 long-term capital gains she had experienced.

Article Sources
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  1. Internal Revenue Service. "Topic No. 409, Capital Gains and Losses."

  2. Internal Revenue Service, "Publication 544, Sales and Other Dispositions of Assets," Page 37.

  3. Internal Revenue Service. "Form 1040: U.S. Individual Income Tax Return," Page 1.

  4. Internal Revenue Service. "About Form 1040, U.S. Individual Income Tax Return."

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