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# The Game of Capital Gains … and Losses

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Certain things happen with age that we don’t even realize. Our hormones change, our brains get smaller, and fat literally vanishes from the bottom of our feet (yes, it’s true). We also begin to accumulate capital assets, as we become more financially “mature.”

Capital assets include items such as real estate, cars, stocks, bonds, and other investment types, such as mutual funds and ETFs. Apart from certain personal use items, like cars or boats, the goal for most capital assets is that their value will increase over time.

If you sell an asset for more than you paid for it, you will realize a capital gain. If you sell it for less than what you paid, you will realize a capital loss. The operative word here is sell. There will be no tax on your assets appreciating in value, until you sell them. Seems simple, right? But wait, there’s more…

Capital gains and losses are classified as long-term or short-term. If you hold an asset for more than one year before selling it, the capital gain or loss is long term. If your holding period is one year or less, the gain or loss is short-term. This categorization matters for tax purposes. Gains realized on assets held for more than a year are taxed at lower rates than short-term assets.

To determine your gain or loss in a given year, know that gains and losses in the same year are netted against each other. For example, assume that you make the following transactions in a year; Sold stock A for a long-term gain of \$100; sold bond B for a short-term gain of \$25; sold mutual fund C for a short-term loss of -\$100; sold ETF D for a long-term gain of \$500. To determine your net capital gain or loss for the year, start by grouping the types together. In this example, the initial result is a long-term capital gain of \$600 and a short-term capital loss of -\$75. Subtract the loss from the gain and your final result is a net, long-term, capital gain of \$525.

Related: The Relationship Between Bonds and Interest Rates

The tax rate schedule for long-term capital gains is different from that of ordinary income.  For most taxpayers, the tax rate applied to long-term gains will be between 0% and 15%. In 2018, the maximum, long-term capital gain tax rate is 23.8%. Compared to the maximum income tax rate of 39.6%, you can see the preferential tax treatment given to long-term investments. Short-term capital gains, on the other hand, are considered ordinary income for tax purposes and are taxed as such.

Once a capital gain is realized and the appropriate amount of tax is paid, you can mostly consider it a wrap. Capital losses, however, linger for tax purposes, which is a good thing. Capital losses that exceed gains in a given year can be used to offset income and future gains. The IRS allows you to use \$3,000 of this loss to reduce ordinary income for the year and any remaining losses can be used to offset future gains in years to come.