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Long-term vs. short-term gain


Dear Tax Talk,
What is the current capital gains rate if you sell stock in less than one year? I believe if you hold the stock for over a year, the rate is 15 percent, but I was wondering what the short-term rate is. -- Barbara

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Dear Barbara,
Many people seem to forget that in order to get the long-term preferential capital gains rate of 15 percent, they have to hold their investment for more than a year. To be precise, you have to sell at least one year and one day later to qualify for the reduced rate. Capital gains that are realized from the sale of property held for one year or less are not given a preferential rate.

This means that you are taxed on these gains at the same rate as your other income such as salaries, interest, rents and pension income. For example, if you are in the 25 percent tax bracket, you will pay 25 percent tax on your short-term gains; if you are in the 35 percent bracket, the tax is 35 percent.

The only thing you can do to reduce the tax bite on short-term gain is try to unload loss positions at the end of the year. For example if you have stock that has a cost of $10,000 and has declined in value to $8,000, you might want to consider selling that stock to offset other gains you had during the year. The holding period of the depreciated stock is not relevant, as it offsets your gains from stock. If you still have overall short-term gains, you still will be in the higher tax bracket, but you will have managed to reduce some of the tax bite.

You can also reacquire the stock that you sold after 31 days without losing the benefit of recognizing the loss. In that case, I hope the sold stock has not changed in value.

-- Posted: May 6, 2004




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