A Complete Guide to Capital Gains and Losses: Short-Term vs. Long-Term

By Tax&Facts | Published on Feb 4, 2025 | Read: 3 Mins

Short-Term Capital Gain and Loss

Short-Term Capital Gain:

This is the profit you make from selling an asset (like stocks, bonds, or real estate) that you held for one year or less. The gain is considered "short-term" because the asset was held for a short period of time before being sold.

Short-Term Capital Loss:

This is the loss you incur when you sell an asset you held for one year or less at a lower price than what you paid for it.

Tax Rate:

Short-term capital gains are taxed at your ordinary income tax rate, which can range from 10% to 37% (based on your total taxable income).

Short-term losses can offset short-term gains, and if your losses exceed your gains, you can offset up to $3,000 ($1,500 if married filing separately) of ordinary income.

Long-Term Capital Gain and Loss

Long-Term Capital Gain:

This is the profit from selling an asset that you held for more than one year. The gain is considered "long-term" because the asset was held for a longer period before being sold.

Long-Term Capital Loss:

This is the loss you incur when you sell an asset you held for more than one year at a lower price than what you paid for it.

Tax Rate:

Long-term capital gains are typically taxed at a lower rate than short-term gains. The tax rates are generally 0%, 15%, or 20% depending on your income level.

• 0% tax rate applies for lower-income individuals.
• 15% tax rate applies to most middle-income individuals.
• 20% tax rate applies to high-income individuals.

Long-term losses can offset long-term gains. If your long-term losses exceed your long-term gains, the remaining losses can be used to offset short-term gains or other types of income.

Key Differences:

• Holding Period: Short-term: Held for 1 year or less. Long-term: Held for more than 1 year.
• Tax Rate: Short-term: Taxed at ordinary income rates. Long-term: Taxed at preferential rates (0%, 15%, or 20%).

Example:

If you buy stock for $1,000 and sell it for $1,500 within 6 months, you would have a short-term capital gain of $500.

If you buy a house for $200,000 and sell it for $250,000 after 2 years, you would have a long-term capital gain of $50,000.

Capital loss carryover

A capital loss carryover is a provision in tax law that allows individuals to apply a capital loss from one year to offset capital gains in future years. This means that if you sell an asset (such as stocks, bonds, or real estate) at a loss, you can carry that loss forward to offset taxable gains in subsequent years, thus reducing your overall tax liability.

Here’s how it works in simple terms:

• Current Year Loss: If you have a capital loss in a particular year that exceeds your capital gains for that year, you can use the loss to offset up to $3,000 ($1,500 if married filing separately) of other income, such as wages, in that year.
• Carryover: If your capital losses exceed $3,000, or you don't have any gains to offset, the remaining loss can be carried over to future years.
• Future Years: The carried-over loss can be used to offset future capital gains or income, following the same rules. You can carry the loss forward indefinitely until it is fully used up.

Here's an example of how a capital loss carryover works:

Scenario:

Let’s say in Year 1, you sold some investments at a loss.

Capital gains in Year 1:

$2,000

Capital losses in Year 1:

$8,000

Step 1: Offset capital gains

First, you can use your $8,000 in capital losses to offset the $2,000 in capital gains.

Capital gains after offset: $2,000 - $2,000 = $0 (capital gains are now gone).

Step 2: Offset other income

Next, since your capital losses are greater than your capital gains, you can use up to $3,000 of the remaining loss ($8,000 - $2,000 = $6,000) to offset other income, like wages.

You can subtract $3,000 from your income, lowering your taxable income for the year.

Step 3: Carryover the remaining loss

After applying the $2,000 to capital gains and $3,000 to other income, there’s still $1,000 left ($6,000 - $3,000 = $3,000, and $3,000 - $2,000 = $1,000). This $1,000 can be carried over to Year 2.

Step 4: Apply carryover in Year 2

In Year 2, if you have capital gains of, say, $5,000:

You can apply your $1,000 carryover loss to offset these gains, reducing your taxable capital gains to $4,000.

Summary of Results:

• Year 1: Capital gains = $0. Offset up to $3,000 against other income (such as wages). Carryover to Year 2: $1,000 loss.
• Year 2: Capital gains = $5,000.

Yes, you can deduct a long-term capital loss from short-term capital gains.

In the U.S., capital losses—whether short-term or long-term—are first applied to offset capital gains. Here's how it works:

Netting Capital Gains and Losses:

First, short-term capital gains (gains from assets held for 1 year or less) and long-term capital gains (gains from assets held for more than 1 year) are netted separately against any corresponding losses.

If you have short-term gains and long-term losses, the long-term loss can offset the short-term gain.

Similarly, if you have long-term gains and short-term losses, the short-term loss can offset the long-term gain.

Excess Losses:

If your total losses (from both short-term and long-term) exceed your total gains, you can use the excess loss to offset other types of income (such as wages or salary) up to $3,000 per year ($1,500 if married filing separately). Any remaining losses beyond that can be carried forward to future years.

Example 1: Short-Term Gains and Long-Term Losses

Short-Term Capital Gains: $8,000 (gains from assets held for 1 year or less)

Long-Term Capital Losses: $5,000 (losses from assets held for more than 1 year)

How it works:

First, the long-term capital loss can offset part of the short-term capital gains.

$8,000 (short-term gain) - $5,000 (long-term loss) = $3,000 (remaining short-term gain).

Result:

After the offset, you will still have $3,000 of short-term capital gains to report.

Example 2: Long-Term Gains and Short-Term Losses

Long-Term Capital Gains: $12,000 (gains from assets held for more than 1 year)

Short-Term Capital Losses: $4,000 (losses from assets held for 1 year or less)

How it works:

First, the short-term capital loss can offset part of the long-term capital gains.

$12,000 (long-term gain) - $4,000 (short-term loss) = $8,000 (remaining long-term gain).

Result:

After the offset, you will have $8,000 of long-term capital gains to report.

Summary:

In Example 1, the long-term loss reduces your short-term gain, leaving you with a smaller taxable amount of short-term gain.

In Example 2, the short-term loss reduces your long-term gain, leaving you with a smaller taxable amount of long-term gain.

In both cases, capital losses help reduce your overall taxable income!