Difference in Short-Term & Long-Term Capital Gains

by Lisa Bigelow, studioD

The Internal Revenue Service defines a capital asset as something that's owned and used for personal or investment purposes. When you sell an asset, the difference between what you paid for it and what you sold it for is a capital gain or a capital loss, depending on whether or not you made money on the transaction. Whether or not your gain is short- or long-term depends on how long you owned the asset.

Definition of an Asset

Assets are anything you own that has value. Stocks, bonds and cash are assets. So are homes, cars, jewelry and artwork. Keep in mind that if you receive an asset as a gift or as part of an inheritance, the IRS may treat the sale of that asset differently. In addition, according to the IRS, if you sell personal property such as a house or a car, and you incur a loss, it's not tax deductible, regardless of how long you held the asset or how much you lost.

Long- and Short-Term Capital Gains

IRS rules regarding how assets are classified are simple. If you sell the asset after owning for longer than a year, then your capital gain -- or loss -- is a long-term. Conversely, if you sell the asset within a year of ownership, then it's a short-term gain (or loss). The day that you officially acquired the asset is your start date, and the day you officially sell it is the date of disposal; the period in the middle is the holding period. The holding period is what you count when classifying gains or losses as short or long-term.

Net Capital Gains and Losses

How capital gains are taxed has been the subject of Congressional debate in the past. There are a variety of capital gains tax rates, and what you're taxed depends upon the type of asset you sold and how long you held it. The IRS considers your net capital gain or loss when calculating your income taxes. If you have a net capital gain, that means the total of your long-term gains exceeded the sum of your short-term losses and long-term carryover losses from previous years; a net capital loss means you lost more on your assets than you gained during the tax year.

Capitals Gains Tax Rates and Reporting

Most capital gains are taxed at a rate of 15 percent, although proceeds from selling collectibles and qualified small-business stock is taxed at 28 percent. The proceeds from some real property sales that must recapture depreciation are taxed at a maximum rate of 25 percent. If you sustained a net capital loss, then you may claim as a deduction a maximum of $3,000. If you lost more than $3,000, you can carry over the losses into subsequent years.

About the Author

Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.

Photo Credits

  • Stockbyte/Stockbyte/Getty Images