What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


What Constitutes a Long-Term Capital Gain?

Original post by Erika Johansen of Demand Media

A long-term capital gain is the profit received from the sale of a capital asset, such a stock or mutual fund, that is owned for one year or more. Capital gains receive different federal tax treatment than other forms of investment, and the tax owed on a capital gain is based on how long the asset was owned. Long-term capital gains have a lower tax rate than short-term capital gains.

Contents

Capital Assets

A capital asset is any type of asset that is purchased with the primary intent of profit, rather than enjoyment. Capital assets may typically include financial investments such as stocks or bonds, real estate holdings, collectibles such as coins or art, and virtually anything else that the purchaser buys with the expectation of appreciation of the asset. However, property that the purchaser buys with the primary intent to live in would not be considered a capital asset. For instance, machinery or other equipment used in manufacturing, non-rare automobiles, or non-antique furniture. These types of assets are expected to depreciate rather than appreciate, and therefore would not constitute capital assets. Section 1221 of the Internal Revenue Code contains detailed information defining capital assets.

Capital Gains

Capital gains are the profit that a seller reaps from selling or otherwise transferring a capital asset to another party. Historically, U.S. tax law has granted capital gains a lower tax rate than other forms or property. In calculating whether the sale of a capital asset constitutes a gain, the law will compare the selling price against the basis of the asset. Basis generally refers to the purchase price of the asset, but it may also include other costs of acquisition, such as shipping. Sale of an asset for a greater amount than the seller's basis in that asset constitutes a capital gain.

Long-Term Gains

A long-term capital gain is distinguished from a short-term capital gain by the length of time that the seller has held the asset. An asset held for 12 months or longer is subject to the long-term capital gains tax rate.

Tax Treatment

Under IRC Section 1222, individual taxes are assessed based on the net result of capital gains against capital losses. Taxpayers report these gains on IRS Form 1040, Schedule D. Most net capital gains receive a 15 percent tax rate. Short-term capital gains are subject to the income tax rate, which is usually considerably higher.


                   

References

About the Author

Erika Johansen is a lifelong writer with a Master of Fine Arts from the Iowa Writers' Workshop and editorial experience in scholastic publication. She has written articles for various websites.


Advertisement