What is a 'Long-Term Capital Gain or Loss'

A long-term capital gain or loss is a gain or loss from a qualifying investment owned for longer than 12 months before it was sold. The amount of an asset sale that counts toward a capital gain or loss is the difference between the sale value and the purchase value, or simply, the amount of money the investor gained or lost when he sold the asset. Long-term capital gains are assigned a lower tax rate than short-term capital gains in the United States.

BREAKING DOWN 'Long-Term Capital Gain or Loss'

When taxpayers file their returns with the Internal Revenue Service (IRS), they report the net total of their long-term capital gains earned in the tax year. For example, if someone has a long-term gain of $50,000 and a long-term loss of $40,000 in a calendar year, he reports $10,000 as a capital gain. However, short-term capital gains are treated differently when calculating net capital gains.

Difference Between Long and Short-Term Capital Gains

Short-term capital gains come from assets held for less than a year, while long-term gains come from assets owned for over 12 months. The IRS taxes short-term capital gains as regular income, and it taxes long-term capital gains at a special capital gains tax rate. The capital gains tax rate ranges from 0 to 20%, as of 2016, and it depends on the tax filer's income.

For example, imagine an individual tax filer has taxable income worth $415,000. In addition, he has short-term capital gains worth $100,000. As the IRS treats his short-term gains as regular income, the agency applies a 39.6% tax or $39,600. He also has long-term capital gains worth $100,000. As he is in the top tax bracket, the IRS applies the top rate for long-term gains, and he pays 20% or $20,000 in tax. Although the gains are worth the same amount, he pays $19,600 less in tax on the long-term gain.

Difference Between Long and Short-Term Capital Losses

Like short-term capital gains, short-term losses arise from assets that have been owned for less than a year. However, short-term losses are treated just like long-term losses, from a tax perspective, and tax filers can claim short-term capital losses against their long-term capital gains. An investor who has long-term gains and losses and short-term gains and losses, will have to net the long-term gains and losses against each other, and do the same for the short term gains and losses. Then the net long-term gain or loss is netted against the net short-term gain or loss. This final net number is then reported on Form 1040.

For example, imagine a tax filer has $50,000 in short-term capital gains and $200,000 from long-term capital gains. He also has $100,000 in long-term capital losses and $50,000 in short-term capital losses. His net short-term capital gain is 0. His net long-term gain is $100,000 and this difference has to be reported as capital gains income to the IRS.

  1. Short-Term Gain

    A short-term gain is a capital gain realized by the sale or exchange ...
  2. Capital Loss

    A capital loss is the loss incurred when a capital asset that ...
  3. Tax Loss Carryforward

    A tax loss carryforward is an opportunity for a taxpayer to carry ...
  4. Capital Gains Distribution

    Capital gains distribution occurs when a mutual fund manager ...
  5. Tax Planning

    Tax planning is the analysis of a financial situation or plan ...
  6. Capital Asset

    A type of asset that is not easily sold in the regular course ...
Related Articles
  1. Taxes

    What You Need To Know About Capital Gains And Taxes

    Find out how your profits are taxed and what to consider when making investment decisions.
  2. 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.
  3. Investing

    7 Year-End Tax Planning Strategies

    Do you have a capital loss that could be booked and used to offset future tax liabilities? If so, it may be time to sell.
  4. Tech

    Using Tax-Loss Harvesting to Keep Your Gains

    Harvesting tax losses is a key skill that investors can use to keep more of their money in their pockets the next time they file taxes.
  5. Investing

    Expect Big Capital Gains from These Funds in 2016

    Investors in actively-managed mutual funds should be prepared for big capital gains in 2016 and the tax hit that comes with them.
  6. Taxes

    How Are Futures & Options Taxed?

    We present a basic introduction to the US tax processes of futures and options.
  7. Investing

    7 Tips for Tax-Managed Investing

    Use these seven tips to reduce the tax impact on your taxable portfolio.
  8. Taxes

    Tax tips for the individual investor

    Keep more of your money in your pocket with these seven guidelines.
  9. Financial Advisor

    How to Dodge Big Tax Hits on Your Portfolio

    An investment plan that helps clients minimize related tax hits adds even more value to an already well-thought out strategy. Here are some tips.
  10. 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.
  1. 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 >>
  2. 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 >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center