What is Long Term Capital Gain? | Definition, Working, Pros vs Cons

The crucial part of financial development for a person is the right investment strategy. Gaining financial prosperity without any investment is nearly impossible. Along with the investment amount, the investment duration also plays an important role in financial growth. A common say in the investment community is that a short-term investment is nothing more than a gamble, and for long-term prosperity, an investor should look for long-term capital gain. In their opinion, long-term capital gain is the best way to prosperity. Let’s learn how long-term capital gain works and its advantages and disadvantages.

Key Takeaways

1. Long-term capital gain is a profit made on the sale of an asset held for more than one year.
2. It is taxed at a lower rate than short-term capital gains made on the sale of an asset held for less than one year.
3. Assets that may generate long-term capital gains include stocks, real estate, and mutual funds.

How does it work?

Long Term Capital Gain is a type of profit realization from an asset sale that a person held over one year. This asset can be real estate property, stock, jewellery, precious metals, stocks, or bond. The price difference decides the amount of capital gain between the asset’s purchase price and the asset’s sales price.

For example, if anyone purchases 1000 share of X Company at $30 and holds it for two years and sells the share at $50 after two years, then the long-term capital gain will be $50,000 – $30,000 = $20,000. Now the person is liable for tax on this $20,000 profit. At the financial year’s end, the investor must declare this amount in the income tax return file.

The benefit of long-term capital gain is that the government considers it a positive market activity. Market experts believe it is essential for market consolidation and reduce volatility in the market. As a result, most governments worldwide offer various tax incentives for long-term capital gain. In most cases, the tax rates vary on the investment duration. Generally, an investor has to pay 0% to 20% on a long-term capital gain.

Advantages of long-term capital gain

There are many advantages associated with long-term capital gain. Many professional investors believe it is the best way for a bright financial future. Long-term capital gain enjoys various tax breaks from the government. In financial statistics, it has been proven that exponential financial return is possible with a long-term investment strategy. It also reduces volatility in the market and helps the market consolidate in a better way. The investor does not require micro-management of his investment very often. Therefore, many people consider it a relaxed way of getting financial benefits over a long period.

Disadvantages of long-term capital gain

There are also some disadvantages associated with long-term capital investment. An investor needs to lock his money for a long-term on the project. For this reason, it reduces financial flexibility. Another problem with long-term investment is that a small investment delivers less return. For this reason, many small investors avoid long-term capital gain. They take more risk and approach short-term capital gain.