A Long-term Capital Gain (LTCG) or Loss arises from the sale of securities, capital assets, or § 1231 assets held for more than 12 months. Net long-term capital gains for individuals are typically taxed at a maximum rate of 15%, though individuals in the 10% or 15% tax brackets enjoy a 0% tax rate on capital gains through 2012. For corporations, a net LTCG is taxed as ordinary income.
Types of Capital Gains and Losses
Short-term vs. Long-term
- Short-term Capital Gains/Losses: These refer to gains or losses from assets held for one year or less. They are taxed at ordinary income rates.
- Long-term Capital Gains/Losses: Refers to gains or losses from assets held for more than one year. They benefit from preferential tax rates lower than short-term gains.
§ 1231 Assets
- § 1231 Assets: These are real or depreciable business properties held for more than one year. They get special tax treatment where net gains are taxed at capital gains rates while net losses are deducted as ordinary losses.
Tax Implications
Individual Taxation
- Tax Rates: Individuals benefit from a reduced tax rate on LTCGs, capped at 15%. For those in lower tax brackets (10% or 15%), the rate could be 0% through 2012.
- Deductions: Up to $3,000 of net long-term capital loss (LTCL) can be deducted against ordinary income per year. Any excess loss can be carried forward to offset future gains.
Corporate Taxation
- Tax Rates: Corporations do not enjoy the preferential rates for LTCGs and treat them as ordinary income.
- Carryback and Carryforward: Corporations cannot deduct net LTCL, but they can carry losses back three tax years and forward five tax years to offset capital gains, though not to create a net operating loss.
Examples
Example 1: Individual Investor
Jane purchases stock in January 2021 for $10,000 and sells it in February 2023 for $15,000. Jane’s LTCG is $5,000, taxable at a maximum of 15% (or 0% if she is in the lower tax bracket through 2012).
Example 2: Corporate Entity
ACME Corporation sells a commercial building held for three years, realizing a $50,000 gain. This gain is treated as ordinary income for ACME Corporation, not benefiting from reduced tax rates like an individual would.
Special Considerations
- Capital Loss Carryforward: Individuals can carry forward indefinite unused capital losses exceeding the yearly $3,000 deduction limit.
- Net Operating Loss: Corporate net LTCL cannot result in a net operating loss for taxation purposes.
Historical Context
The preferential tax treatment of long-term capital gains dates back to the Revenue Act of 1921 in the United States, created to encourage investments in longer-term assets. Recent changes, such as the 0% tax rate for lower income brackets, are part of efforts to stimulate investment and savings.
Applicability
Long-term capital gains and losses are applicable for:
- Individual Tax Filers: Generally preferring holding assets over 12 months for tax benefits.
- Corporate Entities: Managing asset sales to optimize tax liabilities and utilizing carryback and carryforward provisions effectively.
Related Terms
- Ordinary Income: Income earned from providing services and the sale of goods, taxed at regular rates.
- Net Operating Loss (NOL): Occurs when a taxpayer’s allowable deductions exceed their gross income in a tax year.
- Capital Gains Tax: Tax on the profit from the sale of an asset or investment.
FAQs
What is the current tax rate for long-term capital gains?
Can corporate long-term capital losses offset ordinary income?
How long can I carry forward my capital loss?
References
- Internal Revenue Service (IRS) Publications: Detailed tax code descriptions and provisions.
- Revenue Act of 1921: Historical legislation texts outlining the origin of capital gains tax treatment.
- Tax Policy Center: Research articles on capital gains tax.
Summary
Long-term capital gains and losses represent the profit or loss on the sale of assets held longer than 12 months. Taxed favorably for individuals but treated as ordinary income for corporations, they incentivize long-term investment. Understanding their tax implications, applicability, and historical evolution is crucial for effective financial planning and compliance.
