What’s the difference between short-term and long-term capital gain?

April 01, 2021 : H&R Block

Want to know the difference between a short term and long-term capital gain? You’re in the right spot.

First, let’s define capital gains. Then, we’ll cover the difference between the two terms and how each of them are taxed. Believe it or not, short- and long-term capital gains are taxed at different rates!

Capital gain

capital gains taxIf you earned money on an investment and later sell it, you received a capital gain. It’s the difference between what you paid for an asset, and what you sold it for. On contrast, if you lost money on an investment you’ve sold, you endured a capital loss.

Capital gain or loss can come multiple sources, including:

  • Bonds
  • Mutual funds
  • Real property
  • Stocks

If you’ve received capital gain (sometimes called “realized” a capital gain), it’s considered taxable income. Learn more about capital gain taxes here. Both short- and long-term capital gains are subject to taxation.

Short-term capital gains

A short-term capital gain or loss occurs when you sell assets that you owned for one year or less. Short-term capital gains are taxed at an ordinary income tax brackets.

Long-term capital gains

A long-term capital gain or loss involves assets you’ve held for longer than one year. Long-term capital gains are taxed at the following rates, depending on your taxable income:

  • 0% – If your taxable income is less than:
    • $40,000 for single or married filing separately
    • $80,000 for married filing jointly / qualifying widower
    • $53,600 for head of household
  • 15% – If your taxable income is more than the amount listed above, but less than:
    • $441,450 for single
    • $496,600 for married filing jointly / qualifying widower
    • $469,050 for head of household
    • $248,300 for married filing separately
  • 20% – If your taxable income is more than the thresholds set at the previous tax rate (15%)

Most capital gains are taxed at the 0% or 15%. There are exceptions to the rule, however. The taxable capital gains from section 1202 qualified small business stock and net capital gains from selling collectibles is taxed at 28%. Unrecaptured section 1250 gains from selling real property is taxed at 25%.

Where is capital gain income reported?

Your financial institution will issue you Form 1099-B showing the sale of the stock and the taxes withheld. Use this form to calculate and report short- and long-term capital gain or loss on Form 8949, Sales and Other Dispositions of Capital Assets. Then, you should summarize capital gains and deductible capital losses on Schedule D (Form 1040), Capital Gains and Losses.

A scenario – Capital gains tax on home sale

Many people will encounter capital gain on the sale of their home. So, what is the capital gains tax on a home sale?

If you meet the conditions for the sale of home capital gains tax exemption, you can exclude up to $250,000 (or $500,000 for a married couple filing together) of gain on the sale of your main home. Learn more about the capital gain home sale exemption. If the sale exceeds a $250,000 profit, you will have to pay taxes on it. Learn more about how to calculate capital gains tax.

Where to go for more tax help for short- and long-term capital gains

Our tax pros know the ins and outs of taxes and are dedicated to helping you better understand taxes – including how investments and capital gain can impact them.

Make an appointment with one of our tax pros today.

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