Long-Term Capital Gain or Loss
Definition
A long-term capital gain or loss is the profit or loss from the sale of an asset that you held for more than 12 months. Assets held 12 months or less generate short-term gains or losses. Long-term gains generally receive more favorable tax treatment than short-term gains; capital losses are treated the same regardless of holding period.
How it works
- Gain or loss = sale price − purchase price (basis).
- Long-term vs. short-term is determined by whether you held the asset for more than 12 months.
- Long-term capital gains are taxed at preferential rates (0%, 15%, or 20%), depending on your taxable income.
- Short-term capital gains are taxed as ordinary income at your regular income tax rate.
- Capital losses (short- or long-term) offset capital gains and may reduce taxable income as described below.
- Report capital gains and losses on Schedule D when filing your tax return.
Key points
- Long-term gains: taxed at 0%, 15%, or 20% based on income.
- Short-term gains: taxed at ordinary income rates.
- Capital losses: can offset capital gains; excess losses can reduce ordinary income within annual limits and be carried forward.
- Annual capital loss deduction limit: $3,000 ($1,500 if married filing separately). Any loss beyond that is carried forward to future years until fully used.
Example
Melanie bought shares of TechNet Limited for $175,000 several years ago and sold them for $220,000 this year — a long-term gain of $45,000, taxed at long-term capital gains rates. She also sold a vacation home she’d owned less than a year for $82,000 after buying it for $80,000 — a short-term gain of $2,000 taxed as ordinary income. If instead the vacation home sold at a $2,000 loss, that short-term loss could offset part of her long-term gain.
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Common questions
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Can you deduct a long-term capital loss?
Yes. You can use capital losses to offset capital gains. If losses exceed gains, you may deduct up to $3,000 of net loss against other income each year ($1,500 if married filing separately) and carry forward the remainder. -
Is there a limit on total capital losses?
There is no limit on the amount you can incur. The limit applies to the annual deduction you may claim ($3,000), with the remainder carried forward indefinitely until used. -
Does the IRS track carryovers?
Yes. You carry forward unused losses and may deduct up to $3,000 each subsequent tax year until the entire loss is offset. -
Does the sale of a primary home follow the same rules?
No. If you meet eligibility requirements, you may exclude up to $250,000 of gain ($500,000 for married filing jointly) on the sale of your primary residence under separate rules.
Bottom line
Holding investments for more than a year typically reduces the tax rate on gains. Capital losses can offset gains and up to $3,000 of ordinary income per year, with excess losses carried forward until fully used.
Sources
- Internal Revenue Service, Topic No. 409: Capital Gains and Losses
- Internal Revenue Service, Topic No. 701: Sale of Your Home