Difference in Short Term & Long Term Capital Gains

You only pay taxes on your capital gains when you sell the item.

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Capital assets refer to just about anything you own and use for personal or investment purposes, like stocks, your car or your house. When you sell the capital assets for more than you paid for them, you must pay taxes on the gain. Your gain could be classified as either a short-term or long-term capital gain.

Holding Period

The technical difference between short-term and long-term capital gains is how long you held the asset before you sold it. If you held it for more than a year, it's a long-term gain. If you held it for one year or less, it's a short-term gain. When counting your holding period, don't include the day you buy it, but do count the day you sold it.

Taxation Differences

Short-term capital gains are taxed as ordinary income while long-term gains receive preferential tax treatment. For example, in 2012 the maximum ordinary income tax rate, which applies to short-term capital gains, is 35 percent, while the maximum long-term capital gains tax rate is 15 percent.

Offsetting Losses

If you have capital losses in the same year you have capital gains, you can use them to offset your capital gains. However, you can't just pick and choose which gains to offset. Instead, you have to first use all of your short-term losses to offset your short-term gains and your long-term losses to offset your long-term gains. If you have any excess, such as if you have a net long-term gain and a net short-term loss, you could use those extra short-term losses to offset your long-term gains.

Inherited Assets

If you sell an asset you inherited, your profits always count as long-term gains. There is a special tax code provision that automatically treats inherited property as being held for more than one year, regardless of how long you owned it and how long the decedent owned it. If, however, you receive the property as a gift, you are allowed to tack on the donor's holding period to your own, but it's not automatically a long-term gain.