Watch Related Videos
comments
The short term capital gains tax is what you pay the government when you have a profit on the sale of a certain type of asset. Understanding the short term capital gains tax can help you decide what type of assets to buy and how long to hold them.
Defining a Capital Asset
Not everything you buy, hold and sell is a capital asset, but many, many things are. The Internal Revenue Service defines a capital asset as almost “everything you own for personal purposes, pleasure or investment.”
The following list offers a number of examples of capital assets.
Defining a Capital Gain
A capital gain occurs when you buy a capital asset and then sell it for more than you paid for it. The difference between what you paid and what you sold the capital asset for is a taxable amount. That is your capital gain.
Similarly, a capital loss occurs when you buy a capital asset and sell it for less than the amount you paid.
The Difference Between Long Term and Short Term Gains
The federal tax code levies taxes on short term capital gains and long term capital gains differently.
A short term capital gain is the gain on the sale of a capital asset that you have owned for one year or less. A long term capital gain is the gain on the sale of a capital asset that you have owned for more than a year.
Short Term Capital Gains Tax Rates
The short term capital gains tax is the same as your tax bracket. In other words, the short term gain on the sale of a capital asset is taxed as ordinary income.
Long term capital gains can be taxed as high as 28 percent, depending on what type of asset was bought and sold.
Seller Beware
There’s an old saying for anyone who buys anything and that is “buyer beware,” but when it comes to short term capital gains tax, it should be “seller beware.”
All capital gains - whether short term or long term - must be reported on your income tax forms. Depending on your tax bracket, it could be more advantageous to sell a capital asset while it is considered a short term asset. If your tax bracket exceeds the long term capital gains tax rate, it could be to your advantage to hold the investment until you have a long term gain. The key is to understand the implications for your personal financial situation from the short term capital gains tax and the long term capital gains tax.
Additionally, while capital losses may be deducted from your income, there is a limit as to how a great a loss you can claim each year.
Defining a Capital Asset
Not everything you buy, hold and sell is a capital asset, but many, many things are. The Internal Revenue Service defines a capital asset as almost “everything you own for personal purposes, pleasure or investment.”
The following list offers a number of examples of capital assets.
- Stocks
- Mutual Funds
- Bonds
- Real Estate
- Precious Metals
- Coins
- Fine Art and Collectibles
Defining a Capital Gain
A capital gain occurs when you buy a capital asset and then sell it for more than you paid for it. The difference between what you paid and what you sold the capital asset for is a taxable amount. That is your capital gain.
Similarly, a capital loss occurs when you buy a capital asset and sell it for less than the amount you paid.
The Difference Between Long Term and Short Term Gains
The federal tax code levies taxes on short term capital gains and long term capital gains differently.
A short term capital gain is the gain on the sale of a capital asset that you have owned for one year or less. A long term capital gain is the gain on the sale of a capital asset that you have owned for more than a year.
Short Term Capital Gains Tax Rates
The short term capital gains tax is the same as your tax bracket. In other words, the short term gain on the sale of a capital asset is taxed as ordinary income.
Long term capital gains can be taxed as high as 28 percent, depending on what type of asset was bought and sold.
Seller Beware
There’s an old saying for anyone who buys anything and that is “buyer beware,” but when it comes to short term capital gains tax, it should be “seller beware.”
All capital gains - whether short term or long term - must be reported on your income tax forms. Depending on your tax bracket, it could be more advantageous to sell a capital asset while it is considered a short term asset. If your tax bracket exceeds the long term capital gains tax rate, it could be to your advantage to hold the investment until you have a long term gain. The key is to understand the implications for your personal financial situation from the short term capital gains tax and the long term capital gains tax.
Additionally, while capital losses may be deducted from your income, there is a limit as to how a great a loss you can claim each year.
