What Is a Long-Term Capital Gain or Loss?

Definition and Examples of a Long-Term Capital Gain or Loss

To count as a long-term capital gain or loss, an asset generally has to be held for more than a year. This time frame starts the day after you buy it and goes through the day you sell it, presumably at a price that's higher or lower than what you bought it for.

This time frame, and how it impacts your taxes, is set by the Internal Revenue Service (IRS). If the IRS says your asset counts as long-term, then the proceeds can be taxed under capital gains tax rates.

These rates are much lower than ordinary income tax rates. In contrast, short-term gains are taxed at regular income tax rates, which range up to 37% depending on your income and filing status. The income limits are also indexed for inflation and can change from year to year, hence why 2023 income limits are higher than 2022.

Suppose you bought $1,000 worth of stock on Nov. 1, 2020, then sold it on Nov. 15, 2022, for $1,500. You would earn $500 on your investment. Because you held the stock for more than one year, that $500 would be a long-term capital gain.

The $500 gain would be taxed based on a capital gains rate. This is usually no higher than 15% unless you are a very high-income earner. That 15% is likely far lower than your ordinary income tax rate. For example, the tax rate for individuals with an income of $80,000 falls into the 15% long-term capital gains tax rate bracket, but the 22% tax rate bracket for ordinary income.

What about long-term capital losses? You can use those first to offset long-term capital gains. To build off the example above, suppose you also bought $1,000 worth of another stock on Nov. 1, 2020. You then sell it on Nov. 15, 2022, for $500. That means you had a $500 loss rather than a gain.

That $500 long-term capital loss would offset your earlier $500 long-term capital gain. Since they are equal, that works out to a $0 total gain. This means you wouldn’t owe any capital gains taxes (assuming you didn’t sell other investments that year).

How Do Long-Term Capital Gains or Losses Work?

A long-term capital gain or loss is usually based on time, such as holding an asset for over a year. There are, though, some exceptions. For example, if you inherit stock, that will automatically be eligible for long-term capital gains when you eventually sell. This is true no matter how long the previous owner held the stock before passing it on to you.

Long-term gains are then eligible for capital gains tax rates of 0%, 15%, or 20%, in most cases.

Though there are exceptions to long-term capital gains rates, these rates are still far below what you would pay based on your ordinary income tax rates, which short-term capital gains count toward.

You can use long-term losses to offset a variety of other gains, depending on how much those losses are compared to your gains. This can lower your tax bill by quite a lot.

For instance, long-term losses can be used to first offset long-term capital gains. However, if you have more long-term losses than long-term capital gains, you also can use those losses to offset short-term capital gains. If you still have more long-term losses than any type of capital gain, you may be able to reduce your taxable income by the lesser of $3,000 or your total net loss entered on Line 21 of Schedule D.

And if you lost more than what's allowed, you can carry those extra losses forward and claim them in future tax years until they're totally used up. Per the IRS, your carryover is more than the lesser of your capital loss deduction allowed for the year, or "your taxable income increased by your allowable capital loss deduction for the year."

What Do Long-Term Capital Gains or Losses Mean for Individuals?

Understanding long-term capital gains or losses can help you save money on your taxes. For example, if you’re thinking of selling a stock but it hasn’t quite been a year since you bought it, you might find that it’s worth your while to hold on a little longer. That way, the proceeds become long-term capital gains and are taxed at the lower rate.

Long-term capital losses aren’t necessarily as valuable, however, unless you use them to offset your long-term gains. But if you can’t do that, and it looks like your stock is going to remain a loss even if you hold it a little longer, you might choose to sell anyway.

This would then be considered a short-term capital loss (a loss on an asset you held for less than a year) instead of a long-term one. You can use a short-term loss to offset any short-term capital gains you have. This also lowers your tax bill.

No matter what kind of gains or losses you have, figuring out the right tax strategy can require a lot of nuance. Because your tax situation can change each year, and because so many factors impact how much your tax bill will be, it’s important to analyze your situation each year at tax time. Working with a professional will help you decide the best way to use long-term capital gains or losses.