Special Tax Treatment for Long-Term Gains

Saratoga Tax Lawyers  – Gains from the sale of capital assets such as stocks and other securities held over a year are referred to as long-term capital gains, while those held for shorter periods are called short-term. Long-term gains enjoy special tax treatment while short-term gains are taxed as ordinary income.

It is frequently asked if it is worth the risk holding a security long-term versus cashing in on short-term gain. Of course, no one has a crystal ball that can predict the future performance of a particular stock or the market in general, but we can provide some guidelines that will help you with your risk-reward analysis. The following chart illustrates the difference between short- and long-term capital gains rates and the net savings based on a taxpayer’s tax bracket. Keep in mind that your tax bracket is also a function of your total income including the capital gains. Therefore, the larger the gain, the greater the chance you will move into a higher tax bracket.

Tax Bracket
Short-Term
Rate
Long-Term
Rate
Net Long-Term Savings
10%
10%
0%
10%
15%
15%
           0%
15%
25%
25%
15%
10%
28%
28%
15%
13%
33%
33%
15%
18%
35%
35%
15%
20%
39.6%*
39.6%*
20%*
19.6%

 

* As part of the American Taxpayer Relief Act of 2012, a 39.6% tax bracket was added for higher income taxpayers along with a 20% tax on capital gains to the extent the taxpayer is in the 39.6% tax bracket.

As example, suppose you are in the 28% tax bracket and have a potential $10,000 capital gain. The tax for short-term gain is 28% or $2,800. On the other hand, if you held the asset for over a year, the gain would be taxed at 15% or $1,500. Your savings would be $1,300.

Now it is up to you to decide whether the savings of $1,300 is worth the risk of holding the stock until it qualifies as long-term.