Table of Contents
- What Is a Long-Term Capital Gain or Loss?
- Understanding Long-Term Capital Gain or Loss
- Important Note on Capital Losses
- Example of Long-Term Capital Gains and Losses
- Fast Fact on Home Sales
- Can You Deduct a Long-Term Capital Loss?
- Is There a Limit on Long-Term Capital Losses?
- Does the IRS Track Capital Loss Carryover?
- The Bottom Line
What Is a Long-Term Capital Gain or Loss?
Let me explain this directly: a long-term capital gain or loss, for tax purposes, is the profit or loss you get from selling an investment you've held for more than 12 months.
If you've held the investment for less than 12 months, it's treated as a short-term capital gain or loss.
You should know that long-term capital gains usually get better tax treatment than short-term ones, but capital losses—whether short or long— are handled the same way.
Key Takeaways
- Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income tax bracket.
- Short-term capital gains are taxed at the same rate as your regular income, which is higher for most people.
- Long-term capital losses can offset future long-term capital gains.
Understanding Long-Term Capital Gain or Loss
The gain or loss on your investment is simply the difference between what you sold it for and what you paid for it—that's your net profit or loss.
The IRS treats long-term and short-term capital gains differently for taxes. Long-term gains get taxed at 0% to 20% based on your bracket, while short-term gains are hit with ordinary income tax rates, which are usually higher.
Capital losses don't distinguish between short-term and long-term; they're treated identically.
When you file your taxes, report all your capital gains and losses on Schedule D.
Important Note on Capital Losses
You can deduct a large capital loss over multiple years, with an annual limit of $3,000. This is known as carrying forward the loss.
Example of Long-Term Capital Gains and Losses
Consider this scenario: imagine you're Melanie Grant, filing your taxes with a long-term capital gain from selling TechNet Limited stock shares. You bought them a few years ago for $175,000 and sold them this year for $220,000.
That gives you a $45,000 long-term capital gain, taxed at the capital gains rate.
Now, suppose you're also selling a vacation home you bought less than a year ago for $80,000, and you sell it for $82,000 after just a few months.
This results in a $2,000 short-term capital gain, which gets taxed as ordinary income and adds to your annual income.
If instead you sold the vacation home for $78,000, taking a $2,000 short-term loss, you could use that to offset part of your $45,000 long-term gain and lower your tax bill.
Fast Fact on Home Sales
The sale of your primary home is taxed differently; if you qualify, you can exclude up to $500,000 of the gain from taxes.
Can You Deduct a Long-Term Capital Loss?
Yes, the IRS allows you to deduct capital losses and carry them over to the next year. You can claim the lesser of $3,000 ($1,500 if married filing separately) or your total net loss each year, and continue this until the loss is fully used.
Is There a Limit on Long-Term Capital Losses?
There's no limit on the amount you can lose, but you can only deduct up to $3,000 as a capital loss in one year. If it's more, deduct $3,000 and carry the rest forward to future years.
Does the IRS Track Capital Loss Carryover?
You can deduct up to $3,000 in capital losses each year, carrying over the remainder. For example, with a $9,000 loss, you'd deduct $3,000 per year for three years to offset income.
The Bottom Line
The IRS rewards you for holding investments at least a year by taxing profits at lower rates.
You can also deduct or carry forward up to $3,000 in capital losses each year until they're all claimed.
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