FOOL'S SCHOOL DAILY Q&A

Your Capital Gains Rate

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By Selena Maranjian (TMF Selena)
January 8, 2003

Q. What are the current capital gains rates?

A. As of the time of this writing, there are two main holding periods for capital assets. Assets held for a year or less are considered short-term. Those held for more than one year are considered long-term. (There's a new third category, which I'll mention later.)

If you're in the 15% tax bracket:

  • Assets held for a year or less are taxed at your ordinary income tax rate.
  • Assets held for more than a year are taxed at a 10% rate.

If your tax bracket is greater than 15%:

  • Assets held for a year or less are taxed at your ordinary income tax rate.
  • Assets held for more than a year are taxed at a 20% rate.

The difference can be enormous. If you hold a security for 12 1/2 months and then sell, you'll likely pay just 20% tax on the gains. If you sell after holding only 11 1/2 months, though, you'll be taxed at your ordinary income rate, which can be as high as 38.6%. So, you might pay almost twice as much in taxes.

Note that there are some extra-low capital gains rates for which you might qualify, if you've held your assets at least five years and bought after Jan. 1, 2001. Read more about these rules, if you're interested. And here's a great overview of current capital gains rates and how to make sense of them, courtesy of our tax expert, Roy Lewis.

Get the scoop on taxes from the horse's mouth -- the IRS website -- and at the Fool's Tax Strategies area. Also, check out our book, The Motley Fool Tax Guide 2002, which we think is a surprisingly readable and even amusing tax reference book.

If you have any questions, thoughts or opinions on this column, share them with others on our Ask the Fool discussion board.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.