Definition
Long-Term Capital Gain (Loss)
A Long-Term Capital Gain (LTCG) is the profit realized on the sale of securities or other capital assets that have been held for more than one year. Conversely, a Long-Term Capital Loss (LTCL) is incurred when these assets are sold for less than their purchase price. According to IRS regulations, the treatment and taxation rates for these gains and losses differ significantly based on the type of taxpayer (individual or corporation) and the net outcome (gain or loss).
-
For individuals: Net long-term capital gains can be taxed at different rates based on the taxpayer’s ordinary income tax bracket. The highest applicable rate is 15%, but individuals in the 10% or 15% brackets have no tax on long-term capital gains through the specified timeframe, which may be updated periodically by tax legislation.
-
For corporations: Net long-term capital gains are taxed as ordinary income, which means the regular corporate tax rates apply.
-
Loss Limitations: Individuals can only deduct up to $3,000 of a net long-term capital loss against ordinary income per year. Corporations cannot deduct net long-term capital losses, though they can carry them back three years to offset previous long-term capital gains or carry them forward five years. These loss offsets cannot create a net operating loss.
Examples
Example 1: Individual Taxpayer
Jane buys 100 shares of Company XYZ stock for $10,000 and sells them two years later for $15,000. Jane realizes a LTCG of $5,000, which may be taxed at a maximum of 15% if she is in a higher tax bracket. If she is in the 10% or 15% tax bracket, her tax rate on the gain could be 0%.
Example 2: Corporate Taxpayer
ABC Corporation sells a piece of machinery after holding it for three years, resulting in a long-term capital gain of $20,000. This gain is taxed at the corporation’s ordinary income tax rate.
Frequently Asked Questions
Q1: Are there different tax rates for long-term and short-term capital gains?
A1: Yes. Long-term capital gains, on assets held for more than a year, are typically taxed at lower rates compared to short-term capital gains, which are taxed at ordinary income rates.
Q2: Can individuals deduct unlimited long-term capital losses?
A2: No. Individuals can only deduct up to $3,000 of net long-term capital losses against ordinary income each year. Amounts exceeding this limit can be carried forward to future tax years.
Q3: Are long-term capital gains always taxed at 15%?
A3: No. The 15% rate applies to taxpayers not in the lowest tax brackets. Those in the 10% or 15% income tax brackets may benefit from a 0% tax rate on long-term capital gains, depending on prevailing tax laws.
Q4: What happens to unused long-term capital losses for a corporation?
A4: Unused long-term capital losses can be carried back three years to offset previous gains and can also be carried forward for up to five years. However, these losses cannot be used to create a net operating loss for the corporation.
Related Terms
-
Short-Term Capital Gain (Loss): Profit or loss from the sale of securities or capital assets held for one year or less, taxed at ordinary income rates.
-
Net Operating Loss (NOL): Occurs when a company’s allowable deductions exceed its taxable income within a tax period. The NOL can be carried backward or forward to reduce taxable income in other periods.
-
Ordinary Income: Income earned from providing services or the sale of goods, excluding capital gains or losses.
Online Resources
Suggested Books for Further Studies
- Taxes Made Simple: Income Taxes Explained in 100 Pages or Less by Mike Piper
- J.K. Lasser’s Your Income Tax by J.K. Lasser
- Principles of Taxation for Business and Investment Planning by Sally Jones and Shelley Rhoades-Catanach
Fundamentals of Long-Term Capital Gain (Loss): Taxation Basics Quiz
Thank you for reading our comprehensive article on Long-Term Capital Gain (Loss) and for taking the basics quiz. Keep striving for excellence in your understanding of tax principles!
