Are you a Lockheed Martin employee that has investment accounts and/or owns a house? Then chances are, at some point your assets are going to experience a capital gain or loss and it’s important to know how they work together. Sound complicated? It’s not that bad! There are just a few questions that have to be answered first and a few rules to follow (think back to PEMDAS order of operations back in high school math).

The Questions

  • Did I sell the asset for more than I purchased it for? If so, a capital gain has occurred.
  • Did I sell the asset for less than I purchased it for? If so, a capital loss has occurred.
  • Did I hold the asset for one year or less? Then the capital gain or loss is short-term.
  • Did I hold the asset for more than a year? Then the capital gain or loss is long-term.

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.

The Rules

  1. 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).
    • Example:

$7,000 Long-term capital gain (start with the gain)

– $8,000 Long-term capital loss

= $1,000 Net long-term capital loss

  1. 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).
    • Example:

$6,000 Short-term capital gain (start with the gain)

– $2,000 Short-term capital loss

= $4,000 Net short-term capital gain

  1. 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

  1. 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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Be sure and check back next week for more incredibly valuable information. Cheers!

Disclosures*

Financial Planning and Investment Advisory offered by SWMG, LLC a Registered Investment Advisor.

Lockheed Martin Retirement Specialist is not an official title or professional designation nor is it conferred by Lockheed Martin on any individual or company.

Our Complementary consultation and free report are for informational purposes only and provided free without any obligation to utilize or retain our investment advisory services.

SMWG, LLC is not affiliated with or endorsed by Lockheed Martin Corporation. Our expertise comes from working with LMT employees for several years and helping them to retire with confidence.

Investing involves the risk of loss, including loss of principal. Past performance does not guarantee future results. Investment products are not FDIC insured, have no bank guarantee, and may gain or lose value. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable for a client’s investment portfolio.

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