Difference Between Short Term and Long Term Capital Gain

When you invest money in various investment opportunities, there can be either Short or Long term gains depending upon when you sell your investments.

Key Takeaways

1. Short-term capital gains are profits from assets held for a year or less, while long-term capital gains come from assets held for over a year.
2. Tax rates are higher for short-term gains, generally taxed at an individual’s ordinary income tax rate, whereas long-term gains have lower tax rates.
3. Long-term investments focus on growth over time and can yield greater returns, while short-term investments offer quicker but less stable profits.

Short Term vs Long Term Capital Gain

A short-term capital gain is a profit from selling an asset held for less than one year, while a long-term capital gain is a profit from selling an asset held for more than one year. Short-term capital gains are taxed at a higher rate than long-term capital gains, which are taxed at a lower rate.

Examples: 1) Short-term gain: Selling table. 2) Long-term gain: Lending property on rent.

Comparison Table

Parameter of Comparison	Short-Term Capital Gain	Long-Term Capital Gain
Duration of financial asset	Reference to the capital gain as short-term is when the period of the financial asset held is below one year.	Reference to the capital gain as long-term is when the period of the financial asset held is over one year.
Status of the capital asset	Referred as capital asset whenever the owner contains the immovable item for less than 2 years and movable one for less than 3 years.	Referred as capital asset whenever the owner contains the immovable item for more than 2 years and movable one for more than 3 years.
Market aspect	It involves purchasing additional liquid assets over a short-term favorable market perspective. Thus, you can achieve selling over shorter periods, hence quicker profit realization.	Buyer maintains a long-term market perspective. Upon the sale of the asset, higher profits are realized.
Profit attained	Lower profits were obtained because of the shorter holding period. It is also because the asset may have failed to establish itself well in the markets, yet the seller relies upon it for profit gains.	There is a higher profit expectation since the holding period is over a year.
Risk involvement	Lower risks are involved because of the shorter holding period.	Riskier due to the extended waiting period. Later, the asset may turn non-liquid.

What is Short-Term Capital Gain?

Short-term capital gain refers to the movable items owned for 3 years or less (may vary from country to country) just before the date of sale.

If the property/equity is immobile, the holding period is 2 years (may vary from country to country), just before the transfer date. The asset is a short-term capital asset, whereas the value attained is short-term capital gain.

You can calculate short-term capital gain by obtaining the total consideration value and deducting the expenses needed to transfer assets, cost of improvement, cost of acquisition, and any exemption present.

Usually, short-term capital gain fails to benefit from any special tax rates. Taxation is often the same rate as your regular income.

This factor applies to selling any asset held for at most one year. The counting begins from the day of asset acquisition to the selling date.

What is Long-Term Capital Gain?

Long-term capital gain is when an individual or a group holds a movable asset for more than 36 months (may vary from country to country) before the sale date.

In the case of an immobile possession such as land indicates a property owned for more than 2 years (may vary from country to country). The asset is a long-term capital asset, whereas the value attained is long-term capital gain.

You can calculate long-term capital gain by obtaining the total consideration value and deducting the expenses needed to transfer assets, indexed acquisition and improvement costs, and any exemptions present.

Taxation on long-term capital gain is usually lesser if those assets sell quickly and the benefits are achieved almost immediately.

Tax rule encourages the holding, for at least a year, of the assets targeted for capital gains. Such assets include bonds, stocks, real estate, and precious metals.

The tax amount obtained from the capital gain held for over a year is usually lower than one held within a few months.

Main Differences Between Short-Term and Long-Term Capital Gain

1) The tax amounts between short-term and long-term capital gain can vary significantly. Taxation for short-term capital gains does compare to those of your ordinary earnings.

Every income you attain from investments held for a maximum of one year includes your chargeable income for that year, which is then taxed appropriately.

However, long-term capital gains taxation derives from specialized taxable income thresholds.

The capital gain tax may vary mainly from 0-20%. Still, taxation rules for capital gains may differ based on different policies that vary in countries.

2) For financial assets, the holding period lowers to one year. Thus, if an individual holds the asset for less than a year, the gain obtained from transferring such assets is known as a short-term capital gain.

Contrary, if individuals contain security holdings, such as bonds and shares, for over a year, the gain attained from transferring such an asset is known as a long-term capital gain.

3) Short-term capital gain is when the buyer holds the profit from selling the capital asset for less than 3 years.

Contrary, when the buyer holds the profit from the transferred asset for more than 3 years, the gain obtained here is known as a long-term capital gain.

4) By transferring an immovable item, if the holding period before the transfer is less than 2 years, the gain from such a transfer is known as a short-term capital gain.

If the holding of the same asset is for a time length that exceeds 2 years, the gain is known as a long-term capital gain.