IRS Rules for Taxes on Long-Term Capital Gains

Long-term capital gains give you a tax break.

Long-term capital gains give you a tax break.

A capital asset can be practically anything. Stocks and bonds are capital assets. So are real estate, jewelry and automobiles. Any time you sell a capital asset for a profit, it’s called a capital gain. For tax purposes, a capital gain may be either long term or short term. The difference is important, because different tax rates apply to long-term and short-term capital gains.

Capital Gains and Losses

The Internal Revenue Service defines a long-term capital gain as the profit from selling an asset that you owned for more than one year. By contrast, a short-term capital gain results when you sell an asset in one year or less from the date you bought it. You can also end up with long-term and short-term capital losses, which are defined by the same rules. Keep track of each category of gain and loss, because they all play a role in the IRS rules for long-term capital gains.

Captial Gains Tax Rates

Usually the maximum tax rate for long-term capital gains is 15 percent as opposed to the top tax rate for ordinary income of 39.6 percent. However, if you are single with an income over $400,000 or you are married and your income exceeds $450,000, the top capital gains rate goes up to 20 percent. Taxpayers who have a maximum tax rate of 15 percent or less enjoy a long-term capital gains rate of zero. Short-term capital gains are taxed at the maximum rate that applies to your ordinary income.

Net Long-Term Capital Gains

Determining the taxable amount of long-term capital gains is done in accordance with specific IRS guidelines. First, add up all of the long-term gains from transactions carried out during the year. Next, do the same for all long-term capital losses. Suppose you ended up with long-term capital gains totaling $15,000 and long-term losses totaling $5,000. Subtract the long-term losses from the long-term gains to calculate net long-term gain. In this example, the net long-term capital gain amounts to $10,000.

Captial Gains Offsets

Sometimes you have a net long-term capital gain and a net short-term capital loss. You can also have the reverse: a net short-term capital gain and net long-term loss. In either case, up to $3,000 of the losses may be used as a tax deduction to offset the gains. If the net loss is more than $3,000, the leftover amount may be carried over to use in a future year.

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About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

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