Short-Term Capital Gains (STCGs)

What Is a Capital Gain?

A capital gain is an increase in the value of an asset over time. The difference between short-term and long-term capital gains lies in the amount of time the asset was held before it was sold.

What Is a Short Term Capital Gain?

Short-term capital gains refer to the profit earned from selling an asset that was bought within the past twelve months.

Short-term capital gains are usually taxed as ordinary income, with rates varying according to the applicable tax bracket.

What Is Long Term Capital Gain?

Long-term capital gain is the difference in price between buying and selling an asset that has been held for over a year.

Long-term capital gains are taxed at a lower rate than short-term capital gains, but the difference in tax rates varies depending on how high your income is.

Both short-term and long-term capital gains are taxed as ordinary income.

Applicable Tax Rates

Below are the tables for the applicable tax rates for both short-term and long-term capital gains in 2022 and 2023, respectively.

Short-Term Capital Gains Tax Rates (2022)

 Short-Term Capital Gains Tax Rates (2023)

Long-Term Capital Gains Tax Rates (2022)

Long-Term Capital Gains Tax Rates (2023)

Understanding Capital Losses

Capital losses refer to the decrease in value of one's asset.

At any point, you can sell your assets to make a capital gain.

However, because market prices fluctuate throughout the year, you may end up selling for less than what you paid for it. This is called a capital loss, and it will help to offset capital gains that you might accrue later.

A capital loss is offset by a capital gain. If your losses exceed your gains then the difference can be deducted from ordinary income by up to $3,000 per year.

Any remaining amount would be carried over to subsequent years until all of the losses are used up or you run out of taxable income for such deductions entirely.

At the same time, long-term investment losses are considered a long-term loss, while short-term investments are considered as short-term losses.

Lowering Capital Gains Tax

Below are some of the ways you can lower your capital gains tax.

Holding Assets for More Than a Year

In order to save yourself from being taxed at a much higher income bracket, you should avoid short-term investments.

Instead of looking for easy ways to quickly profit in the market, find alternative ways that can help you increase your capital instead.

This will allow you to have more time in order to defer your tax liabilities, allowing you to benefit from the lower tax rate for long-term capital gains.

Carrying Over Losses

For those who expect to have higher capital gains in the future, you can delay your tax liabilities by carrying over your losses.

This allows you to deduct all of your short-term losses from the short-term capital gains that you will earn in the future, then deducting those same losses from any long-term gains as well.

You can carry over your losses to later years. This means that if you still have long term capital losses after this time has passed, they would be considered as a short term loss and deducted accordingly.

Making Use of Retirement Accounts

Retirement accounts such as 401(k) plans may help you lower your capital gains.

Depending on the plan you have, this might either be advantageous or disadvantageous for tax purposes, so it would be best to consult with an accountant who specializes in tax advice before making any transactions regarding your investments.

The Bottom Line

Whether you have a higher or lower income, it is beneficial to take advantage of the difference in tax rates between short-term and long-term capital gains. By doing this, you can potentially save thousands of dollars depending on how much money you make.

If you plan on selling an asset at a profit, you should hold onto your assets for more than a year before selling them in order to take advantage of the difference in tax rates.

Remember that you can save money by carefully choosing which gains to report on your tax return. You can choose what percentage of each type you wish to include based on how it will affect your wallet.

FAQs

1. What are capital gains?

Capital gains are the difference in price between an asset when it was bought and the amount it is sold for.

2. What is a short-term capital gain?

A short-term capital gain is any difference in price that occurs within one year of buying an asset. 

3. What is a long-term capital gain?

A long-term capital gain is any difference in price that occurs after one year of buying an asset. 

4. What are capital losses?

A capital loss is the decrease in price of an asset after being purchased.

5. Why are there higher tax rates for short-term capital gains compared to long-term capital gains?

Short-term capital gains are taxed more because the government taxes on income earned, while long term capital gains taxes are lower because this is viewed as deferred income.