Long-Term Capital Gain or Loss

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.