Guide to short-term vs long-term capital gains taxes (brokerage accounts, etc.)

Businessmen drinking coffee at table

The Internal Revenue Service taxes different kinds of income at different rates. Capital gains, such as profits from a stock sale, are generally taxed at a more favorable rate than your salary or wages. However, not all capital gains are treated equally. The tax rate can vary dramatically between short-term and long-term gains. Generating gains in a retirement account, such as a 401(k) plan or an IRA, can also affect your tax rate.

Short-term capital gains

Short-term capital gains do not benefit from any special tax rate – they are taxed at the same rate as your ordinary income.

  • If you sell an asset you have held for one year or less, any profit you make is considered a short-term capital gain. The clock begins ticking from the day after you acquire the asset up to and including the day you sell it.
  • For 2018, ordinary tax rates range from 10% to 37%, depending on your total taxable income.

Long-term capital gains

If you can manage to hold your assets for longer than a year, you can benefit from a reduced tax rate on your profits.

  • For 2018, the long-term capital gains tax rates are 0, 15, and 20% for most taxpayers.
  • If your ordinary tax rate is already less than 15%, you could qualify for the 0% long-term capital gains rate.
  • For high-income taxpayers, the capital gains rate could save as much as 19.6% off the ordinary income rate.

Gains in retirement accounts

One of the many benefits of IRAs and other retirement accounts is that you can defer paying taxes on any gains.

  • Whether you generate a short-term or long-term gain in your IRA, you don't have to pay any tax at all until you take the money out of the account.
  • The negative is that all contributions and earnings you withdraw from an IRA, even profits from long-term capital gains, are taxable as ordinary income.
  • You gain the benefit of tax-deferral but lose the benefit of the long-term capital gains tax rate.

Capital losses

If your investments end up losing money, rather than generating capital gains, you can use those losses to reduce your taxes. The IRS allows you to match up your gains and losses for any given year to determine your "net" capital gain or loss.

  • If you end up with a net loss, you can use up to $3,000 per year to reduce your taxable income.
  • Any additional losses can be carried-forward into future years, to offset either capital gains or another $3,000 in ordinary income.
  • Since you don't generate capital gains or losses in a retirement account, you can't use trades in IRAs or 401(k) plans to offset your income in this manner.

Brought to you by TurboTax.com

Top 8 Year-End Tax Tips

Learn these top 8 year-end tax tips in order to maximize your tax refund or minimize the taxes you owe.

Read More

Brought to you by TurboTax.com

Can I Claim Medical Expenses on My Taxes?

Medical expenses can take a bite out of your budget, especially if you have unforeseen emergencies that are not fully covered by your insurance. The Internal Revenue Service allows taxpayers some relief, making some of these expenses partly tax-deductible. To take advantage of this tax deduction, you need to know what counts as a medical expense and how to claim the deduction.

Read More

Brought to you by TurboTax.com

Best Investments for Boosting Your Tax Refund

If you're like most taxpayers, you're expecting a tax refund this year. The average refund amount for tax year 2019 was $2,725. If you want to boost your tax refund, consider investing in your retirement or your home before filing your taxes.

Read More

Brought to you by TurboTax.com

7 Feel-Good Tax Breaks: Ways to Get Back When You Give

Some tax deductions offered by the IRS encourage taxpayers to help society. Whether it’s encouraging donations to charity or caring for elderly relatives, there are several ways to reduce your own tax burden and feel good about how you did it. Here are seven tax breaks that might bring a smile to your face.

Read More

Brought to you by TurboTax.com
Read Full Story
Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.