Calculating Taxes On Capital Gains and Capital Losses

by ABC editor

wavesCapital gains taxes

In a previous post we discussed how a capital gain occurs when you sell an investment for a profit.� All capital gains are taxable in the year that you sell your investment so you can�t normally �defer� the gain to a future year and you also don�t have to worry about any capital gains on investments that haven�t been sold yet.

One very important tax rule to be aware of is that if you incur a capital gain on an investment owned less than one year � your capital gains taxes will be significantly higher than if you owned the investment for more than one year.� The capital gains on the short term investment will be taxed as normal income whereas the long term (greater than one year) gains will be taxed at a lower rate.

Capital loss taxes

Capital losses are not taxed since it is a loss rather than a gain.� Why is there such thing as a capital loss if there are no taxes involved you ask?� The answer is that you can use capital losses to offset capital gains to reduce your tax bill.� Capital losses can be carried forward indefinitely so they don�t have to be used in the year the investment was sold.

Offsetting example

John sold two stocks recently � one resulted in a capital gain of $3,000 which will be taxed at a rate of 15% ($450), the second stock was sold at a loss and created a $2,000 capital loss.

John can use the $2,000 loss to offset the equivalent amount of capital gains and reduce the taxable capital gain.� He subtracts the $2,000 loss from the $3,000 capital gain and only pays taxes on the difference – $1,000 so he will pay $150 of tax instead of $450.

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