When accounting for your investments, you should account for your long-term investments separately from your short-term investments because of the big difference in how gains are taxed. According to the Internal Revenue Service, incorrect reporting of capital gains costs the United States $345 billion annually in lost tax revenue.
Long vs. Short
A capital gain represents the difference between what you paid for an investment and what you received for that investment when you sold it, assuming you sold it at a profit. If you sold for less than you paid, you would have a capital loss that could be deductible. Long-term gains come on investments held for more than one year. Short-term gains come when investments are held for a year or less. You report your long-term gains (or losses) on Part 2 of Schedule D. You report your short-term gains (or losses) on Part 1 of Schedule D.
It’s important that you properly report your gains because the IRS taxes long-term capital gains at a much lower rate than short-term gains. As of publication, long-term gains are taxed at a maximum rate of 15 percent, regardless of income. Some lower-income taxpayers, those in the 10-percent or 15-percent brackets, won’t owe any taxes on their long-term capital gains. Short-term gains are taxed as ordinary income, at rates ranging from 10 percent to 38 percent depending on your other income.
If your investments lost money, you can deduct those losses from your ordinary income regardless of whether the loss came on a short-term or long-term investment. You can deduct up to $3,000 per year in capital losses. If your losses in any one year exceed $3,000, you can carry the excess forward to the next tax year and future years at the rate of $3,000 per year until you have used up the capital loss.
Your first step in accounting for your investments is to add up the gains and losses for your short-term investments to get a net short-term gain or loss. You then do the same thing for your long-term investments to get a net long-term gain or loss. If you have gains from both types of investments, stop and report your results on Schedule D. If you end up with a short-term loss and long term gain, you can deduct short-term losses from the long-term gain to get a final long-term tally. Or, if you end up with a long-term loss and short-term gain, you can deduct long-term losses from short-term gains to get a final short-term tally. Add the two final tallies together. If the result is a net loss on your investments, you can deduct up to $3,000 of that loss figure from ordinary income.
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