Long-Term Gains versus Short-Term Gains
If you bought a stock and held onto it until you sold it, you probably have two types of gains:
Long-term capital gains which you are taxed at 15% and usually held two years or more.
Short-term capital gains, taxed at your income tax level (up to 39.6%.)
Most investments are purchased with the idea of holding them for a long time, allowing them to grow. But what happens if you get an unexpected tax bill or need a bit of cash?
If you have a small gain from a stock or mutual fund that you sold, you may qualify to exclude it. The exclusion is based on the holding period; holding period for long term capital gains is one year or more.
If you sell a security that you’ve held for longer than one year, then your gain will usually be a long term capital gain. But what if you sell a security within one year? That security would then be considered a short-term capital gain and would be taxed at your income tax rates.
What is the difference between a long-term capital gain and a short-term capital gain? To put it simply: holding period.
First In, First Out
If you use the First in, first out, FIFO method when you sell any investments, then you will know that it can save you enormous amounts of money in tax. You only pay tax on the value of the investments when you sell them. If you had another method, such as Last in, first out, you would have to pay tax on the gain every year, even if you didn’t sell the investments, so FIFO is a much better solution.
If you sell some shares in a company and use the FIFO method, you will know that you will get the same amount of tax relief as you would if you had sold shares last year, even though they may have increased in value. This is because you will pick up the shares which were purchased first and which have the lowest cost price if there was more than one lot of identical shares to sell.
Getting the Most When Selling Your Investments
Whether you’re a beginning investor or a seasoned veteran, you’ve probably wondered about selling investments – in particular, which gains are taxed like short term gains and which are taxed like long-term gains. A similar question is also frequently asked – what is a long term investment?
The distinction between long-term and short-term capital gains has little to do with whether the asset is property or stock. Instead, the main difference involves the length of time that the investor owned the asset. For instance, if you purchase stock and hold onto it for less than a year before selling, the gain that you realize will be considered short-term capital gains. If you hold the investment for more than a year before selling, the gain will be considered a long-term capital gain. For those who are subject to the Alternative Minimum Tax, or AMT, long-term capital gains are taxed at a rate of 20% while short-term capital gains are taxed at the higher rate of 25%.
The difference between a long-term capital gain and short-term capital gain is significant, and the rate at which each is taxed can vary significantly between investors regardless of the type of asset being purchased. In addition to affecting your tax liability, the right decision for selling assets may also add or detract value to your investment portfolio.
Tax Software Promotions
Tax software companies are always promoting their products with special offers. They normally offer a free basic version, but then charge you for the upgrade to the full program. Don’t be fooled by them.
There are free versions from reputable software companies that offer all of the help you need to file your taxes. TurboTax and TaxCut are just two of the online-based programs that also let you file your federal and state returns for free.
Before using these free tax applications, determine whether you qualify for their free or paid versions. There’s a reason why the free tax software is free and that’s because of a limited amount of features.
Look at the offers from the different companies and compare features and prices. You don’t need a costly product to file your return. Just remember, you pay for what you get.
Be prepared to wait. Even if you file early, it is only human nature to wait until the last minute before you tackle your taxes. As a result, free tax software companies are often swamped on tax day and it may take them several hours to get your returns filed.
If you have already submitted your taxes electronically, then expect to wait anywhere from one to three weeks before you get your refund, depending on your tax return status. There are several tax software companies that are ready to assist you on tax day.