Long-Term and Short-Term Capital Gains

To determine the tax consequences that result from transferring capital assets one must first determine the rate his capital gains will be taxed. The tax rate that applies to capital gains depends on how long he holds a given capital asset. To calculate these rates, first separate the short-term capital gains and losses from the long-term gains and losses. While short-term gains are taxed as ordinary income, the taxes on long-term gains (assets held for more than one year) can range from 8 percent to 28 percent. Short-term assets are those investments held for one year or less. The government taxes short-term capital gains like any other income. These rates can be as high as 38.6 percent. On the other hand, short-term gains are taxed at the regular rate. The regular rate falls within a range of 10 percent to 39.1 percent for 2001. The rate is between 10 and 38.6 percent for 2002.

Long-term investments are those held for more than one year. Long-term gains are taxed at special rates. In 1998, the tax law was amended to reduce the holding period for the 20 percent rate to just 12 months. The holding period begins to run on the day after one acquires the investment asset. It ends on the day the asset is sold. Basically, the day an asset is bought does not count, although the day the asset is sold does. Long-term gains are taxed at lower capital gains rates. But there are exceptions to these rate rules. For example, a taxpayer in a low income tax brackets will have lower maximum tax rates. Also, if he had other regular losses, he may end up having to pay no tax at all.

In fact, there are six additional long-term capitalgains rates; the rates go from 8 percent to 28 percent. Which category applies in any case depends on the seller’s income-tax bracket, the type of asset you sold, and how long the seller held it. There are many rules concerning capital gains and losses and with the holding period for assets. People should check with their attorney or tax or financial advisor to see if any of these apply in their case.


Inside Long-Term and Short-Term Capital Gains