What Is Long Term Capital Gain





What is LongTerm Capital Gain? How does it work? Industry Freak
What is LongTerm Capital Gain? How does it work? Industry Freak from www.industryfreak.com

Long term capital gain (LTCG) is a gain or profit realized from the sale of an asset, such as a stock or bond, held for more than one year. LTCG is taxed at a lower rate than short-term capital gain, or gain from an asset held for one year or less. When it comes to taxes, long-term capital gains are treated differently than short-term capital gains. This is because they are taxed at a lower rate. Long-term capital gains are taxed at 0%, 15%, or 20%, depending on your income tax bracket. The 0%, 15%, and 20% rates are known as the long-term capital gains tax rates.

What Qualifies as Long-Term Capital Gain?

Long-term capital gains are defined as gains realized from investments held for more than one year. Generally, investments held for a year or less are subject to short-term capital gains tax. Investments held for more than one year are subject to long-term capital gains tax. Examples of investments that can result in long-term capital gains include stocks, bonds, mutual funds, real estate, and certain types of commodities. When selling one of these investments, any profit realized from the sale is considered long-term capital gain.

How is Long-Term Capital Gain Taxed?

Long-term capital gains are taxed at three different rates, depending on your income tax bracket. Taxpayers in the 10% and 12% income tax brackets pay 0% in long-term capital gains tax. Taxpayers in the 22%, 24%, 32%, 35%, and 37% income tax brackets pay 15% in long-term capital gains tax. Taxpayers in the highest income tax bracket, 39.6%, pay 20% in long-term capital gains tax. Long-term capital gains tax rates are generally lower than short-term capital gains tax rates, which are taxed as ordinary income.

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How to Calculate Long-Term Capital Gain?

To calculate long-term capital gain, subtract the cost basis (or the original purchase price) from the proceeds of the sale. The cost basis is the original purchase price, plus any related expenses, such as brokerage fees. If the proceeds are greater than the cost basis, the difference is the capital gain. If the proceeds are less than the cost basis, the difference is a capital loss.

Benefits of Long-Term Capital Gain

The main benefit of long-term capital gain is the lower tax rate. Since long-term capital gains are taxed at a lower rate than short-term capital gains, investors may be able to save money on their taxes by holding onto investments for more than one year. Additionally, long-term capital gains can be deferred until the following tax year, which can further reduce the tax liability. For example, if an investor sells a stock in December of one year, they can defer the capital gain until the following April tax filing deadline.

Limitations of Long-Term Capital Gain

One of the main drawbacks of long-term capital gains is that investors are unable to take advantage of short-term market movements. Since the investments must be held for more than one year, investors may miss out on potential profits from quick market swings. Additionally, investments held for more than one year can be subject to inflation, which can erode returns over time. Lastly, long-term capital gains are generally more difficult to predict, as it is impossible to know how long the investment will be held for.

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Qualified Dividend Income and Long-Term Capital Gains

Qualified dividend income is income received from dividends that meet certain criteria. Qualified dividends are taxed at the same rate as long-term capital gains. To qualify, the dividend must be paid by a US corporation or a foreign corporation that meets certain requirements. Additionally, the dividend must be paid on a stock held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Long-Term Capital Losses

Long-term capital losses are losses realized from investments held for more than one year. These losses can be used to offset long-term capital gains. If the long-term capital losses exceed the long-term capital gains, up to $3,000 of the excess loss can be used to offset ordinary income. Any remaining loss can be carried forward and used to offset future long-term capital gains.

Tax Planning with Long-Term Capital Gains

Investors can use tax planning strategies to minimize their tax liability on long-term capital gains. For example, investors can use tax-loss harvesting strategies to offset capital gains with capital losses. Additionally, investors can use strategies such as gift-splitting and charitable giving to reduce their overall tax liability. Finally, investors can use strategies such as tax-deferred investing and retirement accounts to defer taxes until a later date.

Conclusion

Long-term capital gain is a gain or profit realized from the sale of an asset held for more than one year. Long-term capital gains are taxed at a lower rate than short-term capital gains. The main benefit of long-term capital gain is the lower tax rate. However, investors are unable to take advantage of short-term market movements. Additionally, qualified dividend income is taxed at the same rate as long-term capital gains. Tax planning strategies can be used to minimize the tax liability on long-term capital gains.

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