LONG-TERM AND SHORT-TERM GAINS
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A capital gain is the amount of money you make on an investment when it is sold.
It is the difference between the money you sell it for and the money you paid for it. For example, if you buy a stock for $100 and you sell it for $200, you have made a capital gain of $100.
Capital gains and losses apply to capital assets.
A capital asset is an asset you make an investment in.
Stocks, real estate, and even pieces of art are examples of capital assets.
There are two types of capital assets: long-term and short-term.
- Short-term assets are those assets held one year or less.
- Long-term assets are held more than a year.
At the time you sell the asset, you will have a long- or short-term capital gain or loss, depending on how long you held the asset. You must hold an asset for more than one year for it to qualify as a long-term gain.
Long-term gains are taxed at a lower rate than short-term gains, which are taxed at the same rate as ordinary income. Portions of capital losses of either length are tax-deductible. Both long-term and short-term gains should be reported separately on Schedule D of the 1040 tax form.
As if two different types of gains were not enough, let's look at another way to break down capital gains.