What is Long-Term Capital Gain?§
Long-term capital gain is the profit realized from the sale of a capital asset, such as stocks, bonds, real estate, or other investments, that has been held for longer than a defined minimum period. This holding period is generally more than one year. Investments sold after this holding period are subject to long-term capital gains tax rates, which are typically lower than short-term capital gains tax rates, thereby offering a tax advantage.
Example§
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Stock Investment:
- You purchase shares of a company for $10,000.
- After holding the shares for three years, you sell them for $20,000.
- The gain of $10,000 is considered a long-term capital gain and subject to favorable tax rates.
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Real Estate:
- Buying a rental property for $300,000.
- Selling the property after 5 years for $450,000.
- The $150,000 profit is treated as a long-term capital gain.
Frequently Asked Questions§
What qualifies as a capital asset?§
A capital asset encompasses properties such as real estate, stocks, bonds, artwork, and other investments. It essentially includes anything you own for personal or investment purposes.
How long is the holding period for a long-term capital gain?§
Generally, the holding period must exceed one year (365 days) to qualify for long-term capital gains treatment.
What are the tax rates for long-term capital gains?§
In the United States, the long-term capital gains tax rates can be 0%, 15%, or 20%, depending on your taxable income and filing status.
Are there any assets that do not qualify for long-term capital gains treatment?§
Yes, inventory held for sale by a business, depreciable property used in a trade or business, and certain similar assets do not qualify.
How do I report long-term capital gains on my tax return?§
These are reported on Schedule D of your Form 1040 and also on Form 8949 if required. They are then transferred to your main tax form for calculation of liability.
Can losses from the sale of investment be applied against long-term capital gains?§
Yes, capital losses can be used to offset capital gains on a dollar-for-dollar basis and, if necessary, up to $3,000 of capital loss per year can offset other income.
Related Terms§
Capital Asset§
A capital asset is any significant piece of property held for personal use or investment, including real estate, stocks, bonds, and art.
Short-Term Capital Gain§
A short-term capital gain is profit made from the sale of a capital asset held for one year or less. These gains are taxed at ordinary income tax rates.
Tax Basis§
The tax basis is the original value of an asset for tax purposes, used to determine gain or loss upon sale.
Depreciation Recapture§
Used to reclaim the tax benefits of depreciation deductions previously taken on an asset, taxed at ordinary income rates upon sale.
Online Resources§
- IRS Publication 544 - Sales and Other Dispositions of Assets
- Investopedia - Long-Term Capital Gain Definition
- TurboTax - What Are Capital Gains?
References§
- IRS Tax Code
- Investopedia
- TurboTax
Suggested Books for Further Studies§
- Taxes Made Simple by Mike Piper
- J.K. Lasser’s Your Income Tax Professional Edition 2023
- Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes by Tom Wheelwright
- Real Estate Taxation: A Practitioner’s Guide by David F. Windish
