What Is a Long-Term Capital Gain or Loss?
A long-term capital gain or loss is the gain or loss stemming from the sale of a qualifying investment that has been owned for longer than 12 months at the time of sale.This may be contrasted with short-term gains or losses on investments that are disposed of in less than 12 months. Long-term capital gains are often given more favorable tax treatment than short-term gains.
Key Takeaways
- Long-term capital gains or losses apply to the sale of an investment made after owning it for 12 months or longer.
- Long-term capital gains are often taxed at a more favorable tax rate than short-term gains.
- Long-term losses can be used to offset future long-term gains.
- For 2023 and 2024, the long-term capital gains tax stands at 0%–20% depending on one's tax bracket.
Understanding Long-Term Capital Gain or Loss
The long-term capital gain or loss amount is determined by the difference in value between the sale price and the purchase price. This figure is either the net profit or loss the investor experienced when selling the asset. Short-term capital gains or losses are determined by the net profit or loss an investor experiences when selling an asset owned for less than 12 months. The Internal Revenue Service (IRS) assigns a lower tax rate to long-term capital gains than to short-term capital gains.
A taxpayer will need to report the total of their capital gains earned for the year when they file their annual tax returns.The IRS will treat any short-term capital gains earnings as taxable income, while long-term capital gains are taxed at a lower rate. As of 2023 and 2024, this rate ranges from 0% to 20%, depending on the tax bracket that the taxpayer is in.
When it comes to capital losses, both short-term and long-term losses are treated the same. For example, imagine you have two stocks you've held for more than one year and two for less than one year.
It can take several years to fully deduct a significant capital loss, so it pays to ensure you're only selling an investment at a loss if you're certain you can make it up.
In each case, you sold one stock for a gain and one for a greater loss. The sum of the gain and loss of the two stocks you've held for more than one year is your net long-term capital loss. You also sum the gains and losses from the two stocks you held for less than one year for your net short-term capital loss. In both cases, you can add the losses together and deduct or carry over up to $3,000 per year on your tax returns.
Examples of Long-Term Capital Gains and Losses
Imagine Mellie Grant is filing her taxes, and she has a long-term capital gain from the sale of her shares of stock for TechNet Limited. Mellie purchased these shares a few years ago during the initial offering period for $175,000 and sells them now for $220,000. She experiences a long-term capital gain of $45,000, which will then be subject to the capital gains tax.
The sale of your primary home is taxed differently, even if you made gains on the sale. If you meet the eligibility requirements, you can exclude up to $500,000 of the home's sale from gains.
Now assume she is also selling the vacation home she purchased less than one year ago for $80,000. She has not owned the property for very long, so she has not gathered much equity in it. When she sells it only a few months later, she receives $82,000. This presents her with a short-term capital gain of $2,000. Unlike the sale of her long-held shares of stock, this profit will be taxed as income, adding $2,000 to her annual income calculation.
If Mellie had instead sold her vacation home for $78,000, experiencing a short-term loss, she could have used that $2,000 to offset some of her tax liability for the $45,000 long-term capital gains she had experienced.
Can You Deduct a Long-Term Capital Loss?
The Internal Revenue Service lets you deduct and carry over to the next tax year any capital losses. However, you can only claim the lessor of $3,000 ($1,500 if you're married filing separately) or your total net loss.
Is There a Limit on Long-Term Capital Losses?
There is no limit on how much you can lose, but there is a limit on what you can claim as a capital loss deduction in one year. If you have a capital loss of more than $3,000, you can deduct $3,000 and carry over the rest to the next tax year.
Does the IRS Track Capital Loss Carryover?
You're allowed to deduct up to $3,000 in capital losses per year, carrying over any remaining losses into the following year. So, if you've experienced $9,000 in capital losses, each year for three years you can deduct $3,000 from your income to offset the loss.
The Bottom Line
Long-term capital gains and losses result from selling an investment you've held for more than one year. The IRS gives you a tax break for holding investments by reducing taxes on any gains you make from a sale. You can also deduct or carry over to the next tax year up to $3,000 in capital losses, then $3,000 again the following year, and so on, until you've claimed all the losses.
FAQs
Long-term capital gains are often taxed at a more favorable tax rate than short-term gains. Long-term losses can be used to offset future long-term gains. For 2023 and 2024, the long-term capital gains tax stands at 0%–20% depending on one's tax bracket.
Why is capital loss limited to $3,000? ›
The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.
How do you offset long-term capital gains with losses? ›
Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.
How do you treat long term capital loss in income tax? ›
The Income-tax Act,1961 does not allow loss under the head capital gains to be set off against any income from other heads – this can be only set off within the 'Capital Gains' head. Long Term Capital Loss can be set off only against Long Term Capital Gains.
What does the IRS consider long term capital gains? ›
If you hold the asset for more than one year, your capital gain or loss is long-term. If you hold the asset one year or less, your capital gain or loss is short-term. To figure the holding period, begin counting on the day after you received the property and include the day you disposed of the property.
Are capital losses 100% deductible? ›
You can deduct stock losses from other reported taxable income up to the maximum amount allowed by the IRS—up to $3,000 a year—if you have no capital gains to offset your capital losses or if the total net figure between your short- and long-term capital gains and losses is a negative number, representing an overall ...
How many years can you carry forward capital losses? ›
If the net amount of all your gains and losses is a loss, you can report the loss on your return. You can report current year net losses up to $3,000 — or $1,500 if married filing separately. Carry over net losses of more than $3,000 to next year's return. You can carry over capital losses indefinitely.
Can I offset capital losses against income? ›
Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).
Do you have to pay capital gains after age 70? ›
Whether you're 65 or 95, seniors must pay capital gains tax where it's due.
Do capital gains losses count as income? ›
Capital losses can be used as deductions on the investor's tax return, just as capital gains must be reported as income. Unlike capital gains, capital losses can be divided into three categories: Realized losses occur on the actual sale of the asset or investment. Unrealized losses are not reported.
Those losses that you took in the previous calendar year in your portfolio can now be used to save you some money. When filing your taxes, capital losses can be used to offset capital gains and lower your taxable income. This is the silver lining to be found in selling a losing investment.
How do you offset a loss for capital gains tax? ›
One effective strategy to minimise capital gains tax is to plan your losses and time them strategically. Selling assets with a potential capital loss before selling assets with a potential capital gain could allow you to offset the gain with the loss, reducing your overall tax bill.
What are examples of capital losses? ›
Understanding a Capital Loss
For example, if an investor bought a house for $250,000 and sold the house five years later for $200,000, the investor realizes a capital loss of $50,000. For the purposes of personal income tax, capital gains can be offset by capital losses.
What is the treatment of long-term capital gains tax? ›
Tax on Long-term Capital Gain
However, long-term capital gains will not be subject to taxation if securities transaction tax (STT) was paid on the acquisition and sale of the securities. The long-term capital gains tax rate for other assets, such as gold or real estate, is 20%, with an indexation advantage.
Is long-term capital gains tax in addition to income tax? ›
In general, you'll pay state taxes on your capital gains in addition to federal taxes, though there are some exceptions. Most states simply tax your investment income at the same rate that they already charge for earned income, but some tax them differently (and some states have no income tax at all.)
What are the tax brackets for long-term capital gains? ›
Long-term capital gains tax rate 2024
| Capital gains tax rate | Single (taxable income) | Married filing jointly (taxable income) |
|---|
| 0% | Up to $47,025 | Up to $94,050 |
| 15% | $47,026 to $518,900 | $94,051 to $583,750 |
| 20% | Over $518,900 | Over $583,750 |
Dec 21, 2023
On the other hand, if you held the investments longer than a year, long-term capital gains tax rates will apply and any gains are subject to lower preferential tax rates, ranging from 0% to 20% depending on your income level.
