What is the Difference Between Long and Short-Term Capital Gains Tax?

Milford, NH Resident Looks for Insight

Short-term capital gains come from selling capital assets that have been owned for less than one year.  The tax rate for this money is equal to your ordinary tax rate.  Long-term capital gains are typically taxed lower than short-term.  In 2020 this tax rate was either 0%, 15% or 20%, depending on your annual income.  Selling stock, land or a business that has been in your possession for less than a year will significantly increase the amount of taxes you pay on these gains.

A Milford resident was looking to sell some recently purchased stock.  Concerned about the impact on his taxes for these short-term gains, he contacted Merrimack Tax Associates.

Short-Term vs. Long-Term Capital Gains

Stock, property or business that is acquired and sold in less than one year will have any profit taxed significantly higher than those that you have had for over one year.  Dependent on your household income, the rate for short-term gains can range from 10% to 37%.  Plenty of money can be saved on taxes if the asset is held on to for one year or longer.  While still based on your overall income level, these profits are taxed at a much lower rate.

Tips to Minimize Capital Gains Taxes

The easiest way to reduce the amount you pay in capital gains tax is to hold on to the asset for one year or longer.  This will dramatically reduce the tax rate.  You can also carry over losses from year to year.  This works if your losses exceed the limit that the IRS allows you to deduct annually.  The additional loss can be carried into the subsequent year, which can offset any capital gains tax owed.

Tax-advantaged accounts such as 401(k), Roth IRAs and 529 college savings are a great way to avoid capital gains taxes.  Qualified distributions from Roth IRA and 529 accounts are tax free.  Traditional IRAs and 401(k)s will have the taxes paid when distributions are taken.

After learning this information, the Milford resident made the decision to hold on to the stock a little longer until he reaches the one-year mark and it is considered long-term gains.