All taxable gains are reported as income on your federal income tax return. Taxable gains are considered ordinary income if they result from the sale of an asset that was held short term — less than a year — and a long-term gain if the asset is held for more than a year. Ordinary income means that the income is taxed at the full federal tax rate that applies to your income. Short-term and long-term gains are taxed at different rates, and they might also be offset by capital losses, which can reduce the taxation of gain.
Capital gains are either long-term or short-term. Long-term means you held the asset for more than a year before it was sold. When calculating your net, long-term capital gains, add the total long term gains received during the year and subtract any long-term losses (assets that you held for at least a year). For short-term gains, subtract any short-term losses from any short-term gains to arrive at the net, short-term gain or loss. This is important because long-term, and short-term gains are taxed at different rates.
Short-term gains are taxed at the same rate as your regular wages and net business income. For example, if your federal tax rate is 25 percent, and you have a net short-term gain of $20,000, this amount would be taxed at your regular, 25 percent rate. Long-term gains are taxed at a flat rate of 15 percent if, when added to your other taxable income, the gain puts you in the federal tax rate of 25 percent or higher. For example, if your regular tax rate is 25 percent and you have a long-term gain of $30,000, the tax rate on this gain would be 15 percent. If your tax rate after adding the long-term gain puts you at a tax rate of 15 percent or below, there is a zero tax rate on the long-term gain. For example, if your tax rate is 10 percent and you have a long-term gain of $10,000, the tax rate on this gain would be zero.
Since the tax rate for capital gains is significantly lower for long-term gains than short-term gains, consider deferring the sale of an asset so that you can classify it as a long-term gain, as opposed to a short-term gain. The holding period for determining the gain begins on the day you purchased the asset. If you sold other assets at a short-term loss during the year, you might want to sell your short-term assets that will result in gains so that you can offset them with short-term losses.
Capital gains and losses are reported on Schedule D of the federal tax return. Your investment banker should issue a summary statement at the end of each year detailing your long- and short-term gains and losses. Before year-end, consult with your tax professional, such as an enrolled agent, CPA or tax attorney, for guidance and tax planning on your capital gain or loss.