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.
For more tax guidance, head to the IRS website. You can also learn more in our Tax Center and our Tax Strategies discussion board.
