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In the context of taxes, the Internal Revenue Service considers the length of time a person owns an asset when determining whether the asset is a long-term or short-term investment. The IRS levies capital gains taxes on profits made from selling capital assets, and treats short-term and long-term gains differently. For capital gains, the IRS considers any asset held for a year or less to be considered a short-term investment, while assets held for longer than one year are considered long term.
Examples of capital assets include stocks, bonds, mutual funds, homes and cars. They also include collectibles, such as stamps and gemstones. The IRS requires a taxpayer to report the profit from the sale of a capital asset on his tax return, while allowing him to reduce his taxable income by reporting any losses that result from sale of a capital asset.
A capital asset’s holding period begins the day after a person purchases the asset and ends the day after the person sells the asset. If an individual owns a capital asset for one year or less, the IRS considers the investment to be short term. If a person holds or owns an asset for a period of time that exceeds a year, the IRS views his investment as long term. If a person inherits a capital asset, the IRS typically considers his investment in the asset to be long-term regardless of the actual length of time the person owns the asset.
The IRS usually considers a person’s cost basis in a capital asset to equal the amount paid to acquire the asset. If a person inherits an asset, the IRS considers the basis in the asset to equal the fair market value of the asset on the day of the previous owner’s death. The short- or long-term gain or loss an individual records when selling a capital asset equals the difference between the basis in the asset and the sale price.
The IRS generally taxes a gain that results from the sale of a long-term capital asset at a lower rate than ordinary income, or short-term gains. If a person records a loss on the sale of a capital asset that exceeds the limit he may report on his tax return, the IRS allows him to apply the excess to offset his taxable income in future years. A taxpayer reports gains and losses that result from the sale of short-and-long-term capital assets on Schedule D of Form 1040.
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