Long-Term Capital Gains Definition & Tax Brackets
Long-Term Capital Gains Definition
Long-term capital gains are investments that are held for 12 months or longer and then sold. Long-term capital gains are common with long-term investors and are seen as a positive because these investments are in a lower tax bracket.
Long-term capital gains Formula
Remember this formula is applicable to securities that have a minimum holding period of 12 months.
Long-term capital gains = Purchase Value - Current Asset Value
Long-term capital gains Tax Brackets
The government places a lower tax bracket on long-term investments as an incentive for investors to take a more disciplined approach to growing wealth. Below are the capital gains tax brackets for 2007. Please note these numbers will adjust depending on the outcome of the 2008 U.S. Presidential Election.
- 5% for taxpayers in the 10% and 15% tax brackets
- 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets
Long-Term Capital Gains Example
Let's say that an investor purchased $100,000 worth of stock in the year 2002. The investor saw the market tanking during the 2008 credit crisis and was now ready to sell. The investor initially purchased the stock at $25 per share and the stock is now worth $40. This means the trader would have made $60,000 ($15 profit per share * 4,000 shares). This means that the investor now has a long-term capital gains tax responsibility for $60,000. Let's assume this investor is in the 33% tax bracket and will be responsible for the 15% tax on the gains. So, in this example, the investor would be responsible for $9,000 ($60,000 * 15%). Hence the traders after tax income would be $51,000.