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
- Long-term capital gain is a profit made on the sale of an asset held for more than one year.
- 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.
- 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.
Last Updated : 11 June, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
This article provides a well-rounded view of long-term capital gain. I appreciate the inclusion of both advantages and disadvantages for a balanced perspective.
Indeed, it’s crucial for investors to weigh the pros and cons before making investment decisions. This article fosters an informed approach to financial planning.
While the tax breaks and market benefits of long-term capital gain are evident, the lack of financial flexibility is indeed a drawback that must be considered.
I share your perspective, Bethany48. Long-term investment has its pros and cons, and careful consideration is necessary.
I found the article to be quite enlightening and well-structured. Long-term capital gain is an essential aspect of investment that should be fully understood by all investors.
Agreed, Elizabeth. The detailed explanation of long-term capital gain is commendable.
The advantages and disadvantages of long-term capital gain are well outlined here, making it easier to weigh the options and make an informed investment decision.
Absolutely, this article is a valuable guide for investors to better understand the concept of long-term capital gain.
The detailed explanation of long-term capital gain and its role in financial growth is highly informative. A great read for investors at all levels.
Absolutely, Kennedy Amy. Long-term capital gain is worth considering for long-term financial stability.
The discussion on long-term capital gain is detailed and insightful. The tax incentives and advantages make it an attractive option for many investors.
Absolutely, Ryan. The benefits of long-term capital gain are well highlighted here.
Indeed, the potential for exponential financial returns with long-term investment is particularly appealing.
This article provides comprehensive information about long-term capital gains and the advantages and disadvantages associated with it. A great resource for anyone looking to understand investment strategies better.
Couldn’t agree more. I found the explanation about how long-term capital gain works particularly enlightening.
This is very informative. I appreciate the clear explanation of long-term capital gain and how it works for various types of assets.
It’s great to see a clear explanation of long-term capital gain and its implications. This article can serve as a valuable reference for investors.
Although long-term capital gain has its advantages, the aspect of locking in money for a long time may not be suitable for everyone. Different investment strategies should be considered.
Exactly, there’s no one-size-fits-all approach to investment. The article offers a balanced view of long-term capital gain.
I agree with you, Dpalmer. It’s important for investors to carefully assess their financial goals and risk tolerance before choosing an investment strategy.