Now that we have established there are four total possibilities when it comes to selling an asset (short-term capital gain, long-term capital gain, short-term capital loss, long-term capital loss), how in the world are all these kept straight if two or more occur within the same tax year?
Important note: Losses reduce gains, therefore, start with the gain and subtract out the loss.
- Long-term capital losses can only offset long-term capital gains
- If the long-term capital loss is greater than long-term capital gain, then a net long-term capital loss has occurred (and vice-versa).
$7,000 Long-term capital gain (start with the gain)
– $8,000 Long-term capital loss
= $1,000 Net long-term capital loss
- Short-term capital losses can only offset short-term capital gains
- If the short-term capital loss is less than short-term capital gain, then a net short-term capital gain has occurred (and vice-versa).
$6,000 Short-term capital gain (start with the gain)
– $2,000 Short-term capital loss
= $4,000 Net short-term capital gain
- In our example above, A and B have different signs (A is negative because it’s a net loss and B is positive since it’s a net gain). When this occurs, the results can be further netted together.
- $4,000 Net long-term capital gain (start with the gain)
– $1,000 Net short-term capital loss
= $3,000 Net long-term capital gain
- If the results from A and B had been the same sign (for example, A is a net long-term gain and B is a net short-term gain), the final netting process in C isn’t necessary. This is because the tax treatment is different between long-term capital gains and short-term capital gains. Long-term capital gains have preferential tax rates and therefore are more beneficial than short-term capital gains.
If the netting process still seems a bit much, the easy solution is to come see us! Our Lockheed Martin Retirement Specialists engage in tax planning to help clients save in taxes every year as part of a comprehensive financial plan. Thanks for reading!
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