Capital gain, capital loss

CAPITAL gain (or loss) is the result of the purchase and subsequent sale of a capital ASSET. If a stock, bond, or piece of real estate is sold for more than was paid for it, a capital gain on the sale of that asset is realized. If that asset has been held for less than a year, it is a short-term capital gain. If the asset has been owned for more than one year, it is a long-term capital gain. If less is received from the sale of a capital asset than was paid for it, this incurs a capital loss. For tax purposes, short-term capital gains are treated as ordinary INCOME and taxed along with an individual’s other income. However, preferential tax treatment is given to long-term capital gains, on which there is a tax cap (limit), which may be lower than an individual’s marginal income tax rate. Currently, the maximum tax rate applicable to long-term capital gains is 20 percent. Tax caps on longterm capital gains are especially beneficial to taxpayers with high marginal income tax rates. For example, an individual paying a 36 percent marginal income tax rate will have his or her income from long-term capital gains taxed at only 20 percent. There is no benefit to taxpayers with lower marginal income tax rates. A taxpayer in the 15 percent marginal income tax bracket will have his or her long-term capital gains taxed at 15 percent. The long-term capitalgains tax cap is a maximum limit and becomes relevant only when an individual’s marginal income tax rate rises above the 20 percent tax cap. Changes in capital-gains laws affect investor behavior.