What Is Long Term Capital Gain on Stocks?
Original post by Deborah Barlowe of Demand Media
The Internal Revenue Service (IRS) distinguishes between a short-term gain and a long-term gain on the sale of stock based on the length of time you hold or own a security before selling the stock. The IRS further separates a long-term gain from a short-term gain by taxing them differently. The IRS determines the amount of your taxable long-term gain based on your basis in the stock you sold and the amount you received in exchange for the security.
Long-Term vs. Short-Term
A long-term investment in stock differs from a short-term investment based on the period for which you hold the security. Your holding period begins the day after you purchase a stock and ends the day following the one during which you sell the stock. If you hold a stock for one year or less, the gain or loss you record when you sell the security is short-term. If you own a stock for longer than a one-year period, you record either a long-term gain or loss when you sell the stock.
Calculating Long-Term Gain
The difference between the amount of money you receive for your stock and your basis in the security equals your gain or loss. If you receive more than your basis in a long-term investment when you sell your stock, you record a gain. If you receive less money than your basis in exchange for the stock you held for more than a year, you record a long-term loss.
The IRS typically considers your basis in a security to equal the amount you paid to obtain ownership of the stock, including brokerage and transaction fees. If you acquire stock in a manner other than by purchasing it, the IRS determines your basis in the security based on how you assumed ownership of the stock. If, for instance, you transfer ownership of stock to your wife, the IRS considers your wife’s basis in the stock to equal what your basis was before the transfer. If, on the other hand, your wife inherits stock from her deceased father, the IRS considers her basis in the stock to equal the fair market value of the stock as of the day her father died.
You record your long-term capital gains on Schedule D of Form 1040 before transferring the total of your gains to Line 13 of Form 1040. The IRS currently taxes the long-term capital gains that result from your sale of an appreciated stock at a maximum rate of 15 percent. Comparatively, the IRS taxes short-term capital gains as ordinary income. As of the time of publication, the highest rate at which the IRS taxes ordinary income is 35 percent.
- IRS.gov; Ten Important Facts About Capital Gains and Losses; March 2011
- IRS.gov; Topic 409 -- Capital Gains and Losses; March 2011
- IRS.gov; Topic 703 -- Basis of Assets; February 2011
- IRS.gov; Investment Income and Expenses; June 2011
- IRS.gov; Sales and Other Dispositions of Assets; March 2011
- Charles Schwab; Breaking Even -- Short-Term vs. Long-Term Capital Gains; Rande Spiegelman; January 2011
About the Author
Deborah Barlowe began writing professionally in 2010. Earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor?s degree in hotel administration from Cornell University.