The Difference Between Short-Term and Long-Term Capital Gains

The sale of a capital asset will result in a capital gain.  Depending on the holding period of this asset, the gain will either be short-term or long-term. Long-term gains have a lower, preferred income tax rate.  The holding period begins on the day the asset is purchased, as measured by the trade date, to the day the asset is sold. Assets that are inherited are deemed to be held long term.

Capital Assets Include:

  • Stocks
  • Bonds
  • Mutual Funds

Short-Term Capital Gains

Short-term capital gains result from the sale of capital assets held one year or less.  Short-term capital gains are taxed at ordinary income tax rates.  The highest federal ordinary income tax rate for a married couple filing a joint return for 2010 was 35% on taxable incomes of over $373,650. These tax brackets are adjusted for inflation annually by the Internal Revenue Service ("IRS").

Long-Term Capital Gains

Long-term capital gains are from the sale of capital assets held longer than one year. These gains are taxed mostly at 15%.  In 2011 for married couples filing a joint tax return whose taxable income is below $69,000 there is no capital gains tax. A large long-term capital gain relative to the other income declared by a taxpayer may result in an Alternative Minimum Tax ("AMT").  The highest stated rate of the AMT is 28%. The reality is, depending on the facts and circumstances a taxpayer subject to an AMT may pay a tax rate anywhere between 15% and 28%.

Capital Losses

There is a tax advantage with capital losses.  Gains and losses need to be categorized as short-term and long-term. If the net is a loss a taxpayer is allowed to deduct $3,000 of the capital losses and carry forward the balance of the losses into future years.  Unfortunately, unlike many other provisions of the tax code, this $3,000 limit on capital losses has not been adjusted for inflation in decades.

Reporting Transactions

Capital gains transactions are recorded on Form 1040 Schedule D. With the filing of the 2011 returns, there is a new IRS Form, 8949, Sales and Other Dispositions of Capital Assets, which is currently in draft form. This form will be completed and the totals will be transferred over to Schedule D.

The IRS is also revising Schedule D (draft version) and Form 1099-B.  Starting in 2011 Financial Institutions will have to include cost basis information directly on to Form 1099-B. Therefore, Schedule D will function as a summary of all capital gains transactions.

ACTION ITEM:  It's important for taxpayers to understand the difference between short-term and long-term capital gains.

Thomas F. Scanlon, CPA, CFP®

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

Tagged with: , , , , , , , , , , , , , , , , , , , , , ,
4 comments on “The Difference Between Short-Term and Long-Term Capital Gains
  1. George Smith says:

    Awesome content. I look forward to seeing more….thanks.

  2. George Smith says:

    That is awesome. This information is so helpful

  3. Kyle Haycock says:

    That is awesome. This information is so helpful.

3 Pings/Trackbacks for "The Difference Between Short-Term and Long-Term Capital Gains"
  1. […] gains property includes stocks, bonds and mutual funds.  Currently, the stated rate on long term capital gains is 15%.  If you have a net loss after netting all of your gains and losses, the tax deduction […]

  2. tax history says:

    tax history…

    […]The Difference Between Short-Term and Long-Term Capital Gains | Borgida & Company, P.C.[…]…

  3. Small Business Accounting…

    […]The Difference Between Short-Term and Long-Term Capital Gains | Borgida & Company, P.C.[…]…