Understanding Long-Term vs. Short-Term Capital Gains: A Comprehensive Guide

Before discussing the difference between long-term and short-term capital gains, it is important to know the definition for the two. Short-term capital gains are those capital gains that happen within less than a year. Long-term capital gains are those that are longer than a year.

Gains and Assets

Capital gains, defined as the monetary gain of invested assets. Capital assets, such as, invested equipment or monetary assets; such as, stocks and bonds. Each year capital gains are to be accounted for on the individual or corporate tax returns. It is important to note that capital losses can be used to deduct future capital gains in order to outlay the total tax liability among the years that investments lose value.

Taxes

It is also important to know that long term capital gains are taxed at a lower fixed rate. Where short term capital gains are taxed at the income tax rate of the individual. For example a stock is sold at a gain of $500, that year's capital gains of $500 will be taxed at the rate of his or her income tax bracket. The major difference between short term and long term gains is that long term gains are taxed at a lower rate.