Copyright

Capital Gains Treatments: Definition & Advantages

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: How to Prepare a Budget for a Corporation

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:00 Capital Gains Treatments
  • 0:49 Short- and Long-Term…
  • 2:06 Why This Matters
  • 2:39 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed
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!

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support