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Long Term vs. Short Term Gains on Sales of Stocks

Original post by Deborah Barlowe of Demand Media

The Internal Revenue Service (IRS) considers almost everything a person owns to be a capital asset, including stocks. When a taxpayer sells a capital asset, the IRS requires him to report any money he makes from the sale on his federal tax return. Whether the IRS taxes a gain that results from the sale of a stock as short-term or long-term depends on the length of time the seller held or owned the security before he sold it.

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Holding Period

A holding period, the amount of time a person owns a stock before he sells it, begins the day after the individual purchases a stock and ends the day after he resells the security. If a person owns a stock for more than a year, the IRS considers the profit he makes from selling his stock to be a long-term gain. A person records a short-term gain if he owns a stock for a year or less before selling the security for more than his basis in the stock.

Basis

In general, the IRS considers a person’s basis in a stock to equal the amount he paid to acquire the security, including sales commissions and related fees. If a person assumes ownership of a stock in a manner other than purchasing the security, the IRS determines his basis in the stock based on the circumstances preceding his acquisition of the stock. If an individual inherits a stock, for instance, the IRS views his basis in the security to equal the fair market value of the stock at the time of the previous owner’s death. If a person receives stock as payment for services performed, the IRS considers his basis in the security to equal the fair market value of the stock he claimed as earned income on his tax return.

Calculating Gain

Once a person identifies his holding period, he can determine whether he made a short-or-long-term gain on the sale of his stock by subtracting his basis in the stock from the amount he receives in exchange for the security. The difference between the seller’s basis and the amount he receives for the stock equals the person’s capital gain. If, for instance, a person has a basis of $1,000 in a stock he owned for 11 months before selling it for $1,500, his short-term capital gain is $500. If the same person owned the stock for three years before selling it for $1,500, his gain of $500 would be a long-term capital gain.

Taxes

The IRS taxes short-term capital gains as ordinary income. As of the date of publication, the maximum tax rate the IRS levies against ordinary income is 35 percent. In general, the IRS taxes a long-term capital gain at a lower rate than a short-term capital gain. Currently, the IRS taxes a long-term gain that results from the sale of a stock at a maximum rate of 15 percent.


                   

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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.


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