Long-Term Capital Gain or Loss
What it is:
A long-term capital gain or loss is the sale of an that has been held for longer than a certain IRS-defined period of time.
How it works/Example:
Let’s assume you purchase 100 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 ). In the example above, if you sold the Company XYZ after a year, the IRS would consider your $400 a long-term capital gain and tax it at one of several flat rates. However, if you sold the Company XYZ after just three months, the IRS would consider your $400 a short-term capital gain and tax that $400 at your ordinary income , which varies by several factors, including which state you live in, and is generally higher than the long-term rate.
Why it matters:
Establishing a lower capital gains encourages long-term , but there are still many logical reasons an investor might want to sell an before a year has passed.
An investor’s long-term 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 affects specific decisions.