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
Key Takeaways
What is the tax treatment for long-term capital gains and losses? ›
Long-term capital gains are typically taxed at lower rates, meaning there may be a benefit to holding onto your assets for longer before you sell them. Short-term capital gains are taxed at the same rate as your ordinary income. Meanwhile, long-term gains are taxed at either 0%, 15%, or 20%.
Why are capital losses 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 calculate capital gains and losses on taxes? ›
Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference.
- If you sold your assets for more than you paid, you have a capital gain.
- If you sold your assets for less than you paid, you have a capital loss.
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.
What does the IRS consider long term capital gains? ›
Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
What is the long term capital gains tax rule? ›
What you pay depends on your total income and how long you've held onto those assets. If you have a long-term capital gain – meaning you held the asset for more than a year – you'll owe either 0 percent, 15 percent or 20 percent in the 2023 or 2024 tax year.
Are capital losses 100% deductible? ›
Deducting Capital Losses
If you don't have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. If you have more than $3,000, it will be carried forward to future tax years." Here are the steps to take when it comes to tax filing season.
How many years can you carry over capital losses? ›
In general, you can carry capital losses forward indefinitely, either until you use them all up or until they run out. Carryovers of capital losses have no time limit, so you can use them to offset capital gains or as a deduction against ordinary income in subsequent tax years until they are exhausted.
What is the maximum capital loss offset? ›
The Internal Revenue Service (IRS) allows investors to use capital losses to offset up to $3,000 in ordinary income per year. But to understand this concept fully, it's crucial to explore what capital losses are, the distinction between short-term and long-term losses, as well as the rules surrounding capital losses.
Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
Do capital gains losses count as income? ›
Tax Rules. Capital losses can be used as deductions on the investor's tax return, just as capital gains must be reported as income.
What losses can be set off against long-term capital gain? ›
Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-term capital loss can be set off against both long-term capital gains and short-term capital gain. Losses from a specified business will be set off only against profit of specified businesses.
Are capital gains losses offset against other 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).
Can I use more than $3000 capital loss carryover? ›
The IRS caps your claim of excess loss at the lesser of $3,000 or your total net loss ($1,500 if you are married and filing separately). Capital loss carryover comes in when your total exceeds that $3,000, letting you pass it on to future years' taxes. There's no limit to the amount you can carry over.
Are long term capital gains treated as ordinary income? ›
Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or less. Short-term capital gains are taxed as ordinary income at rates up to 37 percent; long-term gains are taxed at lower rates, up to 20 percent.
What are the tax brackets for long term capital gains? ›
Long-term capital gains tax rates 2023
| Capital gains tax rate | Single (taxable income) | Married filing jointly (taxable income) |
|---|
| 0% | Up to $44,625 | Up to $89,250 |
| 15% | $44,626 to $492,300 | $89,251 to $553,850 |
| 20% | Over $492,300 | Over $553,850 |
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.
What is the tax code for long term capital gains? ›
§1222(3), Long-Term Capital Gain
The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 6 months [1 year], if and to the extent such gain is taken into account in computing gross income.
