What's A Long-Term Capital Gain or Loss? Measuring The Difference Between Buying and Selling Investments

Oct 07, 2023 By Triston Martin

If you're looking for extra money and have a long-term investment in assets, it's important to understand what a long-term capital gain or loss is. That said, the concept can be confusing to many individuals and not something an average person would want to try and decipher on their own. That's where this blog post comes in: We'll teach you all about it! From understanding how dividends work to being able to use your knowledge of the tax code when negotiating with your accountant, this guide will help you better understand this complicated topic.

What Is a Long-Term Capital Gain/Loss?

Long-term capital gains and losses are profits or losses that you make on assets that you have held for at least one year. When you sell an asset, like stock (NYSE:MCD), and gain money back from it, this is considered a short-term capital.

If you sell an asset after 1 year, however, the government considers this a long-term capital gain or loss. This is because they want to give you the benefit of being able to invest in assets without having to pay taxes on them each time.

If you buy an asset that you end up selling for more than it was worth when purchased, this is considered a long-term capital gain. If you purchase an asset and sell it for less than what you paid for it, this is a long-term capital loss.

Tax Code Basics

Long-term capital gains are taxed differently than short-term gains, and they're also treated differently depending upon your income level. That said, they are taxed based off of your total taxable income, which is the amount of money that you make in a year. This includes all your wages and other sources of taxable income. They are taxed at different rates for different income levels. For example, those who make more than $39,350 per year pay up to 15% on long-term capital gains, while those who make less than $9,225 only pay up to 0% on their long-term capital gains.

How to Calculate Capital Gains?

To calculate, you can figure them out by subtracting what you paid for the asset from its value when you sold it. To do this accurately, you should use the average price of the asset over a period of time equal to that of when you actually owned it. You can also use a formula to figure out a profit or loss, but this method is only really useful if you are selling an asset that has appreciated in value since you've purchased it.

How Do Capital Gains and Losses Differ?

Capital gains and losses are treated differently, however, when deciding your taxable income. Capital gains are considered "long-term" because the government wants to give you the benefit of holding assets without paying taxes on them each time. When you sell assets for more than what you originally paid for them, this is considered a capital gain from one year of tax-free compounding growth. Long-term capital losses are treated differently, however. This occurs when you sell an asset for less than what you paid for it and are not able to offset your losses with short-term gains.

How Do Tax Rates Work?

Capital gains taxes are worked out in a slightly different way as well. The formula is different, too. Individuals who make more than $39,350 per year may pay up to 15% on long-term capital gains while those who make less than $9,225 may pay up to 0% on their long-term capital gains. As you can see, the more you make, the less of a break you'll get.

How Are Capital Gains Taxed?

Capital gains can also be taxed differently depending on what assets they're coming from. For example, if an individual realizes a capital gain on an asset that is considered "tax-deferred," they may have to pay taxes later on. This includes assets like IRAs or 401ks; however if the capital gain comes from a traditional IRA or 401k or one that includes qualified dividends, this is not the case. In this case, gains made in these accounts are considered tax-deferred and therefore you'll owe taxes later on when you take money out of them. This also applies to assets that are tax-exempt. Most of the time, this means that if you sell an asset that is tax-exempt and realizes a gain, you'll have to pay taxes on the amount of money that exceeds the price you originally purchased it for.

Why Do Capital Gains and Losses Matter?

Capital gains matter because they can make or break your investment portfolio in terms of how much money you'll be able to save for retirement. This is why it's important to understand what type of plan your investments fall into when determining if capital gains will affect them or not.


"I absolutely hate taxes. I want to invest in more tax-deferred retirement accounts without paying more in taxes."

This strategy is sometimes referred to as a "tax-advantaged portfolio," which means that you can take advantage of tax-deferred investing while minimizing the impact of paying tax on your gains. Unlike many other investment strategies, this is one that should work consistently over the long term if done correctly.

"How much time should I spend in stocks?"

This is one of the most common questions that investors face when they first start putting together their portfolio. It's also one of the most important ones as well. In order to find an answer to this question, you need to understand exactly what your goals are and how long you have until you reach them. Once you know these two things, then you will be able to make an informed decision about your own personal situation.

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