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Short Term versus Long Term Capital Gains

March 09, 2022

Short Term versus Long Term Capital Gains

The modern economy offers people many opportunities to make money. Whether a household is looking to make some extra cash on the side, put additional money away from retirement, or whether a person is looking to make their living off of passive income, the current markets are an ocean of opportunity. With that said, in American markets, when a person makes money off the sale of real estate, stocks, collectibles, or various other sellable items, there are taxes associated with these sales. Therefore, the differences between short term and long term capital gains must be considered when calculating taxable income.

What are Capital Gains?

Capital gains are when a person sells a capital asset, which is a significant piece of property such as a car, house, bond, stock, or collectible item (jewelry, art pieces, baseball cards, etc.), at a profit. These assets are subject to taxation and are considered taxable income. This is different from, say, the inventory of a business. Inventory is an item that a person or company purchases with the intent to sell. A capital asset is an item that may serve another function for the person or business (like a home to live in or a computer to do work on) and may not be bought with the intent to upsell. However, if a profit is made on the asset, it does become taxable income.

Short Term Capital Gains

A short term capital gain results from the selling of a capital asset that the person, business, or entity has held for less than a year. Many cryptocurrencies, when sold for a profit, fall under the banner of short term capital gains as the crypto market is highly volatile, so the window for investment in many cryptocurrencies, especially less established ones (i.e. Shibacoin, Safemoon, etc.), tends to be relatively short. However, anything that is held for less than a year and sold for a profit can be considered a short term capital gain.

Long Term Capital Gains

A long term capital gain is an asset that the person, business, or entity has held for more than a year before selling for a profit. Real estate and family heirlooms tend to be classic examples of long term capital gains, as these assets tend to be held onto for a long period of time, whether because the goal is to specifically increase the value or whether it is for practical or sentimental values. Again, like with short term gains, though, anything can fall into the tax category of long term capital gain if the asset has been held for more than a year.

Short Term vs Long Term

So, besides the length of time, what is the difference? It’s the tax bracket. Short term capital gains are taxed much like basic income, and also significantly less favorably. Like with any kind of taxable income, short term capital gains are taxed based on the amount of profit made by the individual. The tax rates start as low as 10% for a single person making up to $10,275 and can go as high as 37% for a single person making over $539,900 for the year.

Meanwhile, long term capital gains are taxed far more competitively, with some tax rates being as low as 0% for a single person making under $41,675 and only going as high as 20% for a single person making over $459,750. For these reasons, many investors will seek long term investments out over short term simply because the tax rates are far more favorable.

Other Factors

Any capital gains that would be considered a collectible is taxed at a flat rate of 28%. This would be any profit made off the sale of jewelry, precious metals, coins, stamps, collectible cards, memorabilia, and anything else that would be considered ‘collectible’ or a ‘collector’s item’.

When it comes to the sale of real estate, there are tax deferments for people who have physically lived in their property for 2 of the 5 years leading up to the sale. The deferment excludes the first $250,000 of capital gains in your taxable income for single filers, and $500,000 for joint filers.

Finally, there are both federal and state taxes. If your state requires you to file and pay income taxes, capital gains will be considered in this. The following states do not have income tax laws, and therefore do not collect capital gains taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.