How to Determine a Long-Term Tax Gain
Having your gains count as long-term capital gains helps because they are taxed at a lower rate than ordinary income, including short-term capital gains. If you don't figure the gains properly, you might miss out on extra costs that you can deduct or forget about carry forwards from previous years.
A long-term capital gain requires that you hold the asset for more than one year. When figuring how long you have held an investment, don't count the day you bought it, but do count the day you sold it. Any assets that you have held for less than one year count as short-term capital gains.
Calculating Gain on Sale
Your long-term tax gain on any particular sale equals what you receive for the item minus what you paid for it. When figuring your receipts, exclude the portion used to pay any transaction fees or broker commissions. Similarly, when you buy an asset, include those fees in the amount you paid. For example, say you buy shares of DEF for $3,000 and pay a commission of $50, your basis is $3,050. If you then sell those shares two years later for $3,600 and pay another $50 in commissions, your long-term taxable gain is $500.
When figuring your long-term capital gain for the year, offset your total with your losses for the year. First, net your long-term capital gains with your long-term capital losses. Then, if you have a net long-term gain, use your short-term losses to offset the gain. Alternatively, if you have a net long-term loss, use it to offset short-term gains. Though it seems like you can just net all your gains and losses together and get the same result, it does make a difference when determining the character of your net gains or losses.
Deductions and Carry-Forwards
If you have a net loss for any year, you can deduct up to $3,000 ($1,500 if married filing separately) and carry the rest into future tax years. For example, if you have $7,000 in losses, you can deduct $3,000 that year and carry the remaining $4,000 forward. If you have losses from previous years, you must use them to offset your gains for the current year. Say you have a $5,000 net long-term gain, but last year you had $2,000 in losses you couldn't deduct. This year, you have to use that $2,000 deduction so you only have $3,000 in taxable long-term capital gains.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."