Capital Gains Treatments: Definition & Advantages

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  • 0:00 Capital Gains Treatments
  • 0:49 Short- and Long-Term…
  • 2:06 Why This Matters
  • 2:39 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Depending on the length of time that you've owned an asset, there are different capital gains taxes that come into effect. This lesson will help you ascertain the difference between short-term and long-term capital gains taxes.

Capital Gains Treatments

Congratulations! The stocks you purchased on a whim have grown dramatically in value, which means that you are now in control of a small fortune! You proved all the naysayers wrong - widgets really were the wisest investment of the last quarter. Excitedly, you go to meet your investment advisor, eager to cash out the stocks and buy a small tropical island with a big yacht.

Understandably, your investment advisor is happy to meet with you. After all, you just became his richest client! However, there's a catch. You've got to determine the proper capital gains treatment on your stock to make sure that you pay the proper capital gains tax. Remember that capital gains taxes are those taxes paid on income derived from investments.

Short- and Long-Term Capital Gains

After the usual niceties, your investment advisor asks you how long you've owned the stocks in question. As it turns out, you've owned your widget company shares for a bit over ten months. However, because the total time owned is still less than a year, you are liable for short-term capital gains taxes. You expected a tax, but not quite one this big! It turns out that the IRS can claim up to 35% of your total profits as income taxes, all because you owned the stock for less than one year. Quickly, you ask what the alternative is.

Luckily, your investment advisor has just the answer. If you own a stock or a security for more than a year, you can sell it and have the profits treated as long-term capital gains. While short-term capital gains taxes are up to 35%, long-term capital gains taxes are rarely more than 15% at the federal level. In other words, if you hold on to your stock for just two more months, you'll get 20% more money!

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