How should you go about netting long-term and short-term capital gains and losses? Here's a concise explanation from our tax strategies area, written by Peter Thelander:
Everything will boil down to one of four situations:
- Long-term gain with short-term gain
- Long-term loss with short-term gain
- Long-term gain with short-term loss
- Long-term loss with short-term loss
Long-term gain with short-term gain
Ahhh -- investment nirvana! Everything nets out to a winner. The long-term gain gets the preferential rate of 10% or 20%, depending on your tax bracket. The short-term gain is taxed with your other income at your marginal rate.
Long-term loss with short-term gain
We have to look at two situations here. If the gain is bigger than the loss, you have a net short-term gain -- taxed at your marginal rate. If the loss is bigger, you have a net long-term loss. Up to $3,000 of losses can be used to offset other kinds of income. Any unused amount will carry forward to the following year as a long-term loss.
Long-term gain with short-term loss
Again, we have to consider two scenarios. If the gain is bigger than the loss, you have a net long-term gain and get to take advantage of the favorable rates for the net gain. If the loss is larger, it is a net short-term loss and, just like the previous situation, you can use up to $3,000 of the loss against other types of income, with any balance carrying forward to the next year as a short-term loss.
Long-term loss with short-term loss
You might want to consider changing your investment strategy! This scenario looks simple, but there is a twist. By now, you know that a maximum of $3,000 in losses will offset ordinary income. So if the total of the two losses is less than $3,000, you're done. But, what if the total loss is more than $3,000 and some must be carried over to next year -- is the carryover short-term or long-term? Well, it can be just long-term, or a combination of long- and short-term. It will never be just short-term, though, because you must use the short-term losses first. If your short-term losses are more than $3,000, you use the first $3,000 to offset ordinary income, then carry the remaining short-term loss, along with all of the long-term loss, over to next year. If the short-term loss is less than $3,000, you can just total the two losses together, take the $3,000 off, and the balance is a long-term loss carryover to the following year.