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Short Term vs. Long Term Capital Gains: What You Should Know

June 26, 2023

Get the most from your investment portfolio by knowing what distinguishes a long-term capital gain from a short-term capital gain. We have broken out the key factors here.

What are capital gains taxes?

Capital gains taxes are taxes levied on profits from the sale of property or an investment.

What are short-term capital gains?

A short-term capital gain results from the sale of an asset owned for one year or less. Short-term gains are subject to taxation as ordinary income and do not benefit from any special tax rates or treatment.

2023 Short term capital gains tax rates

What are long-term capital gains?

A long-term capital gain results from the sale of an asset owned for more than one year. Long-term capital gains are subject to a 0, 15 or 20% tax rate, depending on your income level in the year of recognition.

2023 long-term capital gains tax rates

Make note that collectible assets such as fine art, antiques, etc., are subject to a 28% tax if held over one year. If held less than one year, they are taxed as ordinary income. Additionally, a 3.8% Net Investment Income Tax (NIIT) is applied to those with high incomes and capital gains from investment, dividend and interest income.

What about carried interest?

Carried interest is handled differently. On Jan. 7, 2021, the Department of Treasury and IRS issued final regulations that provided guidance to the “carried interest” rules under Section 1061 of the Internal Revenue Code. Section 1061 provides that capital gain allocated to a “carried interest” holder will only be treated as long-term capital gain if the gain is derived from a sale or other disposition of a capital asset after a holding period of more than three years.

Are there ways to reduce capital gains taxes?

  1. Wait to sell your home. You can typically exclude up to $250,000 of capital gains (up to $500,000 for married filing jointly) if you have owned your home and used it as your main residence for at least two of the five years prior to putting it on the market.
  2. Hold off on selling assets- You will usually pay a lower capital gain rate on the profit of an asset sale if you keep it for more than one year.
  3. Invest in tax-friendly accounts. Investments in 401(k) plans, Roth IRA accounts, and 529 college savings plans are able to grow tax-free or tax-deferred. You are not on the hook for capital gains taxes on any earnings inside the account. Certain instances even result in no tax liability upon withdrawal.

Wondering how you can effectively reduce your capital gains taxes? We can help.

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