If an investment asset is sold for a profit, a capital gain is realised. Tax laws require you to report all capital gains and include the gains in your income to be taxed. Capital gains are divided into long-term gains and short-term gains. Each type is taxed at a different rate.
According to the Internal Revenue Service, any asset you sell for a profit results in a reportable capital gains. Capital gains are most often associated with investments such as stock or real estate. However, if you sell another asset such as a car or piece of antique furniture for more than you paid for it, the resulting capital gain must be reported and the tax on the gain paid.
Long vs. Short Term
A long-term capital gain comes from an asset owned for more than one year. If the asset was owned for one year or less, the resulting gain is a short-term gain. The time an asset is owned is measured from the date it was purchased until the date the asset was sold. Capital gains are only realised if an asset is sold. As long as an investment remains in your possession or portfolio, no capital gain has been realised.
Losses from the sale of assets held for investment can be used to reduce the taxes from capital gains. Capital losses are divided into short-term and long-term losses using the same time criteria for gains. When reporting losses for tax purposes, short-term losses are first used to offset short-term capital gains and long-term losses are used against long-term gains. Excess losses can be used against the other type of gain or other income.
Short-term capital gains are taxed at the tax payer's marginal tax bracket. At the time of publication, income tax brackets ranged from 10 per cent to 35 per cent. Short-term gains will be taxed at an individual's highest tax bracket. Long-term capital gains are taxed at lower rates. If the taxpayer's marginal tax bracket is 15 per cent or less, the long-term gain tax rate is 0 per cent. For tax brackets of 25 per cent and higher, the long-term capital gain tax rate is 15 per cent.