When you invest money in various investment opportunities, there can be either Short or Long term gain depending upon when you sell your investments.
Short Term vs Long Term Capital Gain
The difference between Short Term and Long Term Capital Gain is that Short term gain refers to assets that provide a return for a short period. Long term gain refers to assets that provide returns regularly for a long time. Long term gains are secured while short term gains are for a limited period.
Examples: 1) Short term gain: Selling table. 2) Long term gain: Lending property on rent.
Comparison Table Between Short-Term and Long-Term Capital Gain
|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 to as capital asset whenever the owner contains the immovable item for less than 2 years and movable ones for less than 3 years.||Referred to as capital asset whenever the owner contains the immovable item for more than 2 years and movable ones for more than 3 years.|
|Market aspect||It involves the purchasing of 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, there is a realization of higher profits.|
|Profit attained||Lower profits obtained because of the shorter holding period. It is also because the asset may have failed to establish well into the markets, yet it is what the seller relies upon for profit gains.||There is a higher profit expectation since the holding period is over a year.|
|Risk involvement||Lower risks 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 a time-length of 3 years or less (may vary country to country), just before the date of sale.
In case 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 known as a short-term capital asset, whereas the value attained is short-term capital gain.
You can calculate short-term capital gain by obtaining the full consideration value and deduct 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 of the special tax rates. Taxation is often the same rate as your regular income.
This factor applies to the selling of any asset held for at most one year. The counting begins from the day of asset acquisition up to the selling date.
What is Long-Term Capital Gain?
Long-term capital gain refers to the period whereby 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, it indicates a property owned for more than 2 years (may vary country to country). The asset is known as a long-term capital asset, whereas the value attained is long-term capital gain.
You can calculate long-term capital gain by obtaining the full consideration value, and deduct the expenses needed to transfer assets, indexed acquisition cost, indexed improvement cost, and any exemption present.
Mostly, taxation on long-term capital gain is usually lesser if those assets sell quickly, and the benefits achieved almost immediately.
Tax rule encourages the holding for at least a year, of the assets targeted for capital gains. Examples of 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 that you attain from investments held for a maximum of one year is inclusive of your chargeable income for that year, which is then taxed appropriately.
However, taxation for long-term capital gains derives from specialized thresholds for taxable income.
The capital gain tax may vary mostly from between 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 refers to one whereby the buyer holds the profit obtained 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 time-length that exceeds 2 years, the gain is known as a long-term capital gain.
Frequently Asked Questions (FAQ) About Short Term and Long Term Capital Gain
Can you Avoid Capital Gains Tax if you Reinvest?
There are two different answers to this question.
1) If you are talking about stocks, then the answer is no. The stock you hold in your personal taxable accounts cannot be exempted from capital gains tax.
2) On the other hand, you can avoid capital gains tax by reinvesting in real estate and different insurance policies. There are provisions that allow you to swap properties and move from one policy to another without bearing any capital gains tax.
How Can I Save Tax on Capital Gains?
Every investor wants to make as much profit as possible without paying a large amount in taxes. The good thing is that the government has provided provisions that allow people to save tax on their capital gains.
a) Tax-favored retirement accounts help you tackle the taxes unless you make a withdrawal from the account. You can sell stocks or other investment but you will have to pay taxes only when you make withdrawals.
b) For your regular taxable account, the best strategy is to be a long-term investor. Hold on to the stocks for as long as possible. Short-term investors have to pay more in the taxes as compared to long-term investors.
c) Another great strategy is to invest in real estates and insurance policies. Certain provisions are provided by the Internal Revenue Code that allows investors to swap properties and switch policies without having to face capital gains tax.
How Do I Avoid Long Term Capital Gains on Sale of Property?
There are three different methods to save long term capital gains tax on the sale of a property.
a) Tax exemption on sale of a house property – Long-term capital gains tax on the sale of a house property is exempted if the taxpayer reinvest entire amount into the purchase or construction of another house property.
A taxpayer can invest into 2 house properties but the budget must not exceed Rs 2 crores.
b) Tax exemption on sale of an asset other than house property – The only way to avoid long-term capital gains tax on the sale of an asset other than house property is by investing the entire sale amount into a new residential house property.
The entire sale amount will be exempted from the capital gains tax. The limit for a taxpayer is one house property.
c) Tax exemption on the sale of a house property – Another method to save tax on the sale of a house property is by reinvesting the capital gains into specific bonds as instructed by IRC.
The taxpayer has to invest the capital gains in six months to enjoy the tax exemption.
Important: New house and bonds cannot be sold before 3 years of purchase or else tax exemption will be taken back.
Capital gain is the value or profit attained from the selling or transferring of resources or investments. The amount is usually taxable. It can either be short-term or long-term capital gain.
A short-term capital gain may appear unattractive due to its higher taxation status.
However, there are instances where you can still attain excellent profits from the assets held for a shorter duration.
Conversely, a long-term capital gain may seem reasonable due to the high profits gained with lesser taxation rates. However, you should always calculate whether it will be beneficial to hold the assets for over a year.
If the markets seem to be unsupportive, you may opt-out of the buying position for such-like assets. You can then find out other means of obtaining the best profits possible.
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