Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Short-Term Gain

What it is:

Short-term gain usually refers to the profit on the sale of an investment that has been held less than a certain IRS-defined period of time.

How it works (Example):

Let’s assume you purchase 100 shares of Company XYZ for $1 per share. After three months, the share price increases to $5. This means the value of the investment has increased from $100 to $500, for a capital gain of $400.

Taxpayers report capital gains on IRS Schedule D, but these gains are subject to different tax rates depending on whether they are short-term or long-term (and in some cases depending on the type of asset). In the example above, if you sold the Company XYZ shares after a year, the IRS would consider your $400 profit a long-term capital gain and tax it at one of several flat rates. However, if you sold the Company XYZ shares after just three months, the IRS would consider your $400 profit a short-term capital gain and tax that $400 at your ordinary income tax rate, which varies by several factors, including which state you live in, and is generally higher than the long-term capital gains tax rate.

Why it Matters:

Establishing a higher tax rate for short-term capital gains  encourages long-term investing, but there are still many logical reasons why an investor might want to sell an asset before a year has passed.

An investor’s capital losses sometimes offset all or a portion of his or her capital gains, lowering the investor’s tax bill. There is a limit, however, to how much the investor can offset. Investors should seek the advice of a competent tax professional to understand how capital gains treatment affects specific investment decisions.


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