Taking the Mystery Out of Capital Gains

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The profit you make on the sale of stock is known as a capital gain. If you have owned the stock for a year or longer, your increase is considered a long-term capital gain for income tax treatment. That means you pay the tax at a lower rate than you pay on your earned income or on dividends and other investment income.

Taxation of Long-Term Capital Gains

Generating capital gains could be one of your big opportunities to save on taxes. Under recently enacted tax law, the tax benefit of long-term capital gains has again become substantial. The TaxReconciliation Act of 2001 created several different tax rates that depend on your holding period, which is the time between the date you bought and sold the asset.

Long-term capital gains taxation is limited to a maximum 20% tax rate (10% for gains in the 15% tax bracket) on capital gains on investment assets held more than 12 months. Additionally, the capital gains tax rate on the sale of assets held over 5 years and which are purchased after 2000 is reduced even further to 18% (or 8% for gains in the lowest tax bracket regardless of when purchased).

Tax Treatment of Capital Losses

If you incur losses from the sale of a capital asset, you can deduct those losses to the extent they equal capital gains from the sale of other assets. If your losses exceed your gains, you can only deduct up to $3,000 ($1,500 if you are married and filing separately) of capital losses in a tax year against other income on Form 1040. You can carry losses forward and continue to deduct $3,000 ($1,500 if filing separately) annually against other income until your losses are used up.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.