According to the IRS, taxes rates will depend on the taxpayer’s source of income. Your profits from a stock sale, for example, will be generally taxed at a lower rate compared to your salary or wages. However, this doesn’t mean investment income will be treated the same way. It is important that you understand the difference between long and short terms capital gains tax to make sure that you reap more benefits than pay higher costs. Since both capital gains will significantly affect your tax rate, it’s imperative for us to first break down the difference between the two.
What is Long-Term Capital Gains?
Long-Term Capital Gains are assets owned for more than 12 months. If you are able to hold your assets this long, you can benefit from the reduced tax rate on your profits. Due to the substantial reduction of tax rates for long capital gains, individuals and business were encouraged to keep their investments for a long period of time. There is a difference of 20% tax rate between long-term capital gains rate and short-term gains.
What Are The Tax Rates for Long-Term Capital Gains?
For the year 2015, those who are in the income tax bracket of 10-15% have a capital gains rate of 0%. It means, if you’re earning less than the said bracket, you no longer have to pay income tax on profits from investments that are held longer than 12 months.
On the other hand, those who are in the 25-35% bracket will have a capital gains tax of 15%. For wealthy citizens who are on a 39.6% income tax brackets, capital gains rate will remain at 20%. You may ask your Accountant to give you a detailed calculation of the tax rates based on the different tax brackets for a better understanding.
What is Short Term Capital Gains?
There are two things that differentiate Short Term Capital Gains to the Long Term gains. First, they are assets that are held for less than a year and second, it does not benefit from any special tax rate. They are taxed at the same rate as your ordinary income. If you decide to sell the asset that you have held for less a year or less, the profits you make will be considered as a short-term capital gain. Make sure to count from the day you purchased your asset up to the day it was sold.
What is the Tax Rate for Short-Term Capital Gains?
Since Short Term Capital Gains is taxed as an ordinary income, its tax rates will range from 10-39.6 % for the year 2017 which will also be based on your total taxable income. Taxpayers who file as an individual will be under the 25% tax bracket. However, certain tax deductions or credits will still be implemented if your records show you qualify for these benefits.
Can I Still Benefit From My Capital Losses?
As a taxpayer, you have to know the benefits you can get if ever you lose money from your investments. Even though you’re not generating capital gains, you will still be able to use those losses to reduce your taxes. You can calculate your total capital gain or loss for any given year, and if result to a loss, you are allowed to use up to $3, 000 per year to be able to reduce your taxable income. If there are any additional losses, you can carry it to the future years.
What’s the Difference Between Long and Short Term Capital Losses?
Both short-term capital gains and short-term capital losses are assets that have been owned for less than a year. However, from a taxpayer’s perspective, short term and long terms losses are treated the same way. They can also claim short-term capital losses against their long-term capital gains. If you’re an investor who has both long and short terms gains and losses, you have to net the long-term gains and losses with each other. You have to do the same thing for short-term gains and losses. The net of long-term gain or loss will then be netted against the net short-term gain or loss. Whatever the final net number is, will then be entered to the form 1040.
