Taxable Income, Single
Taxable Income, Married File Separately
Taxable Income, Head of Household
Taxable Income, Married File Together
This rate is much lower than the regular income tax rate. In contrast, short-term gains are taxed at the regular income tax rate, which ranges up to 37% depending on your income and filing status.
Suppose you bought $1,000 worth of stock on November 1, 2020, then sold it on November 15, 2021 for $1,500. You will get $500 from your investment. Since you held the stock for more than a year, that $500 would be a long-term capital gain.
The $500 gain will be taxed based on the capital gains rate. This is usually no higher than 15%, unless you earn very high. That 15% is likely much lower than your regular income tax rate. For example, the tax rate for individuals with incomes between $40,526 and $86,375 is 22% for the 2021 tax year.
What about long-term capital losses? You can use the former to offset long-term capital gains. To build on the example above, suppose you also buy another stock for $1,000 on November 1, 2020. You then sell it on November 15, 2021 for $500. That means you lose $500 instead of profit.
That $500 long-term capital loss will offset your previous $500 long-term capital gain. Since they are the same, it makes a total profit of $0. This means you won’t owe any capital gains tax (assuming you didn’t sell any other investments that year).
How Do Long-Term Capital Gains or Disadvantages Work?
Long-term capital gains or losses are usually time-based, such as holding an asset for more than a year. However, there are some exceptions. For example, if you inherit stock, it will automatically qualify for long-term capital gains when you eventually sell. This is true no matter how long the previous owner held the stock before handing it over to you.
Long-term gains then qualify for a 0%, 15%, or 20% capital gains tax rate, in most cases.
The net capital gains you earn from selling collectibles or Section 1202 eligible small business shares have a long-term capital gain rate of up to 28%. Certain Section 1250 real estate gains are taxed at a maximum rate of 25%.
While there are exceptions to the long-term capital gains rate, this rate is still well below what you would pay under the ordinary income tax rate, which takes into account short-term capital gains.
You can use long-term losses to offset other gains, depending on how much the losses compare to your gains. This can lower your tax bill quite a lot.
For example, long-term losses can be used to offset long-term capital gains first. However, if you have more long-term losses than long-term capital gains, you can also use those losses to offset short-term capital gains. If you still have more long-term losses than any type of capital gain, you may be able to reduce your taxable income to less than $3,000 or your total net loss entered on Line 21 of Schedule D, starting in the 2021 tax year.
And if you lose more than you’re allowed to, you can carry those extra losses forward and claim them in future tax years until they’re completely exhausted. Per the IRS, your remainder is more than the allowable reduction of capital losses for the year, or “your taxable income increases by the reduction of allowable capital losses for the year.”
What Do Long-Term Capital Gains or Losses Mean to Individuals?
Understanding long-term capital gains or losses can help you save money on your taxes. For example, if you’re thinking about selling a stock but it hasn’t been a year since you bought it, you may feel the need to hold out a little longer. This results in long-term capital gains and is taxed at a lower rate.
However, long-term capital losses are not always as valuable, unless you use them to offset your long-term gains. But if you can’t do that, and it looks like your stock will still lose even if you hold it a little longer, you can choose to sell it.
This will then be considered a short-term capital loss (a loss on assets that you hold for less than one year) and not a long-term loss. You can use short-term losses to offset any short-term capital gains you have. It also lowers your tax bill.
No matter what advantages or disadvantages you have, figuring out the right tax strategy can take a lot of nuance. Because your tax situation can change every year, and because so many factors affect the amount you owe on taxes, it’s important to analyze your situation each year at tax time. Working with a professional will help you decide how best to use your long-term capital gains or losses.
- Long-term capital gains or losses generally result from holding the asset for more than one year before selling it.
- For most people, long-term capital gains are taxed at a lower rate than short-term gains or your ordinary income.
- Long-term capital losses are used first to offset long-term capital gains, then to reduce your taxable income if you have more losses than gains.