By: Julio Perez, Fall 2017 IAC Graduate Research Assistant
By now, we can piece enough clues together to more-or-less understand what a capital gain is; namely, a gain to an investor’s initial capital. Indeed, capital gain is defined as the profit that comes when an investment is sold for more than the price the investor paid. In order words, if you buy a share of stock for $2.00 and sell it for $2.01, you just made a capital gain.
So great, I hope you enjoyed this post of “Translate This!”. No, of course that’s not all there needs to be said. Perhaps the second most important concern to an investor after making a profit from their investments is how to lose as little of that profit to taxes as possible. Your capital gains (and capital losses, if you sold your stock at a loss) are usually reported while filing your income tax, which means that the IRS, and not the SEC, is in charge of regulating this part of the process.
Capital gains and losses are classified as either long-term or short-term. A capital gain/loss is long term if the investor holds it for more than a year, counting from the day after the day the investor acquired the asset up to and including the day he disposed of the asset. Short term, of course, is any point prior.
The long-term capital gains are taxed based on the investor’s tax bracket, ranging from no taxes paid on the lower brackets, up to a maximum rate of 20 percent in the highest bracket. Short-term capital gains, on the other hand, are taxed at the same rate as ordinary income.
If you made a poor investment and came out losing, don’t worry about having to pay out extra taxes and adding insult to injury. Capital losses actually provide the taxpayer a tax deduction as a way to mitigate your losses. Your net losses would have to exceed your capital gains to lower your income to the lesser of $3,000 or your total net loss as stated in your Form 1040. If your capital loss exceeds this limit, you can carry over your loss to later years, meaning that even a devastating investment loss can be ameliorated by multiple years of carried-over tax deductions.
Translated: “I made a profit from selling my stock, but I am probably going to have to pay taxes on it.”