Long-Term Capital Gains and Losses: Definition and Tax Treatment

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

Janet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting.

Vikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.

What Is a Long-Term Capital Gain or Loss?

A long-term capital gain or loss, for tax purposes, is the gain or loss stemming from the sale of an investment that was held for longer than 12 months before it was sold.

Investments that are held for less than 12 months are reported as short-term capital gains or losses.

Long-term capital gains generally get more favorable tax treatment than short-term gains. Capital losses, short or long, get the same tax treatment.

Key Takeaways

• For 2024, the long-term capital gains tax is 0%–20% depending on the taxpayer's income tax bracket.
• Short-term capital gains are taxed at the same rate as regular income, which is higher for most taxpayers.
• Long-term capital losses can be used to offset future long-term capital gains.

Understanding Long-Term Capital Gain or Loss

The gain or loss in an investment is the difference in value between the sale price and the purchase price. This number is either the net profit or loss the investor experienced when selling the asset.

The Internal Revenue Service (IRS) distinguishes between long-term and short-term capital gains and taxes them differently. Long-term gains are taxed at 0% to 20% depending on the taxpayer's income tax bracket. Short-term gains are taxed as ordinary income, which is a higher percentage for most taxpayers.

Capital losses, short-term or long-term, are treated the same.

Taxpayers report their capital gains and losses for the year when they file their tax returns. Gains and losses are recorded on Schedule D.

You can deduct a significant capital loss over a period of years. The annual limit is a deduction of $3,000. This is called "carrying forward" a loss.

Example of Long-Term Capital Gains and Losses

Imagine Melanie Grant is filing her taxes, and she has a long-term capital gain from the sale of her shares of stock for TechNet Limited. Melanie purchased these shares a few years ago during the initial offering period for $175,000 and sold them this year for $220,000.

She has a long-term capital gain of $45,000, which will be taxed at the capital gains tax rate.

The sale of your primary home is taxed differently, even if you made gains on the sale. If you meet the eligibility requirements, you can exclude up to $500,000 of the home's sale from gains.

Now assume she is also selling the vacation home she purchased less than one year ago for $80,000. She has not owned the property for very long, so she has not gathered much equity in it. When she sells it only a few months later, she receives $82,000.

This presents her with a short-term capital gain of $2,000. Unlike the sale of her long-held shares of stock, this profit will be taxed as income, adding $2,000 to her annual income calculation.

If Melanie had instead sold her vacation home for $78,000, experiencing a short-term loss, she could have used that $2,000 to offset some of her tax liability for the $45,000 long-term capital gains she had experienced.

Can You Deduct a Long-Term Capital Loss?

The Internal Revenue Service lets you deduct and carry over to the next tax year any capital losses. You can only claim the lessor of $3,000 ($1,500 if you're married filing separately) or your total net loss in a given year. You can do that in every subsequent year until the loss is fully accounted for.

Is There a Limit on Long-Term Capital Losses?

There is no limit on how much you can lose, but there is a limit on what you can claim as a capital loss deduction in a single year. If you have a capital loss of more than $3,000, you can deduct $3,000 and carry it over the rest to subsequent tax years.

Does the IRS Track Capital Loss Carryover?

You're allowed to deduct up to $3,000 in capital losses per year, carrying over any remaining losses into the following year or years. So, if you've experienced $9,000 in capital losses, each year for three years you can deduct $3,000 from your income to offset the loss.

The Bottom Line

The IRS gives you a tax break for holding investments for at least a year by reducing the taxes on the profits you make from their sale.

You can also deduct or carry over to the next tax year up to $3,000 in capital losses, then $3,000 again the following year, and so on, until you've claimed all the losses.

1. Internal Revenue Service. "Topic No. 409, Capital Gains and Losses."
2. Internal Revenue Service. "Publication 550, Investment Income and Expenses," Page 66.
3. Internal Revenue Service. "Topic No. 701, Sale of Your Home."

The Smith Maneuver is a Canadian tax strategy that makes interest on a residential mortgage tax-deductible. Borrowers need a readvanceable mortgage to use it.

The federal first-time homebuyer tax credit was ended in 2010 but there are other state and federal programs designed to encourage homeownership.

Business expenses are costs incurred in the ordinary course of business. Business expenses are tax-deductible and are always netted against business income.

Section 1031 of the U.S. tax code permits a business to postpone taxes on gains from the sale of business property when the proceeds are invested in other property.

The general business credit is the total value of the separate business tax credits a business claims on its tax return for a specific year.

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