Capital Gains and Losses

What's a capital asset, and how much do I have to pay?

What is a capital gain?
Capital Gain Tax Rate - A capital gain is what the tax law calls the profit when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares, and real estate.

What's the difference between a short-term gain and a long-term gain?
A very big difference. The law divides investment profits into different classes determined by the calendar. Short-term gains come from the sale of property owned one year or less; long-term gains come from the sale of property held more than one year.

What is the holding period?
Surprisingly enough, that's the period you hold the property before you sell it. When figuring the holding period, the day you buy property does not count, but the day you sell it does. So, if you bought a stock on April 16, 2006, your holding period began on April 17. Thus, April 16, 2007, would mark the end of the first year. If you sold on that day, you would have a short-term gain or loss. A sale on April 17 would produce long-term results, though, since you would have held the asset for more than one year.

How much do I have to pay?
The tax rate you pay depends a great deal on whether your gain is short-term or long-term.

• Short-term profits are taxed at your maximum tax rate, just like your salary, up to 35%
• Long-term gains are treated much better. Long-term gains are taxed at a flat 15% except for taxpayers in the 10% or 15% bracket. For low-bracket taxpayers, the long-term capital gains rate is just 5%. (There are exceptions, of course, since this is tax law: Long-term gains on collectibles—such as stamps, antiques and coins—are taxed at 28%, unless you're in the 10% or 15% bracket, in which that case the 10% or 15% rate applies; and gains on real estate attributable to depreciation — since depreciation deductions reduce your cost basis, they also increase your profit dollar for dollar — are taxed at 25%, unless you're in the 10% or 15% bracket.)

What is a capital loss?
A capital loss is a loss on the sale of a capital asset such as a stock, bond, mutual fund or real estate. As with capital gains, capital losses are divided by the calendar into short- and long-term losses.

Can I deduct my capital losses?
Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain. So, for example, if you have $2,000 of short-term loss and only $1,000 of short-term gain, the extra $1,000 of loss can be deducted against long-term gain. If short- and long-term losses exceed all of your capital gains for the year, up to $3,000 of the excess loss can be deducted against other kinds of income, including your salary, for example, and interest income.

For more information, see IRS articles Reporting Capital Gains and Losses and Ordinary or Capital Gain or Loss.