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. 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 for 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 the investor experienced when selling the asset. Short-term capital gains or losses are determined by the net profit or loss an investor experiences when selling an asset owned for less than 12 months. The Internal Revenue Service (IRS) assigns a lower tax rate to long-term capital gains than to 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. The IRS will treat any short-term capital gains earnings as taxable income, while long-term capital gains are taxed at a lower rate. As of 2023, this rate ranges from 0 to 20%, depending on the tax bracket that the taxpayer is in.

When it comes to capital losses, both short-term and long-term losses are treated the same. For example, imagine you have two stocks you've held for more than one year and two for less than one year.

It can take several years to fully deduct a csignificant capital loss, so it pays to ensure you're only selling an investment at a loss if you're certain you can make it up.

In each case, you sold one stock for a gain and one for a greater loss. The sum of the gain and loss of the two stocks you've held for more than one year is your net long-term capital loss. You also sum the gains and losses from the two stocks you held for less than one year for your net short-term capital loss. In both cases, you can add the losses together and deduct or carry over up to $3,000 yearly on your tax returns.

Examples of Long-Term Capital Gains and Losses

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 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.

The sale of your primary home is taxed differently, even if you made gains on the sale. If you meet the eligibility requirements, you can exclude up to $500,000 of the home's sale from gains.

Now assume she is also selling the vacation home she purchased less than one 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 $82,000. This presents her with a short-term capital gain of $2,000. Unlike the sale of her long-held shares of stock, this profit will be taxed as income, adding $2,000 to her annual income 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.

Can You Deduct a Long-Term Capital Loss?

The Internal Revenue Service lets you deduct and carry over to the next tax year any capital losses. However, you can only claim the lessor of $3,000 ($1,500 if you're married filing separately) or your total net loss.

Is There a Limit on Long-Term Capital Losses?

There is no limit on how much you can lose, but there is a limit on what you can claim as a capital loss deduction in one year. If you have a capital loss of more than $3,000, you can deduct $3,000 and carry over the rest to the next tax year.

Does the IRS Track Capital Loss Carryover?

You're allowed to deduct up to $3,000 in capital losses per year, carrying over any remaining losses into the following year. So, if you've experienced $9,000 in capital losses, each year for three years you can deduct $3,000 from your income to offset the loss.

The Bottom Line

Long-term capital gains and losses result from selling an investment you've held for more than one year. The IRS gives you a tax break for holding investments by reducing taxes on any gains you make from a sale. You can also deduct or carry over to the next tax year up to $3,000 in capital losses, then $3,000 again the following year, and so on, until you've claimed all the losses.

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. "Publication 523 (2022), Selling Your Home."

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