Introduction: Capital gains and losses play a significant role in the taxation of investment assets. Understanding the principles of capital gains and losses is essential for investors and taxpayers to manage their financial portfolios and optimize their tax liabilities.

Definition of Capital Gains and Losses:

Capital gains are the profits realized from the sale or exchange of capital assets, such as stocks, bonds, real estate, and collectibles, which have appreciated in value since their purchase.

Capital losses, on the other hand, occur when the selling price of a capital asset is less than its purchase price. Capital losses can result from the sale of depreciated assets or investments that have declined in value.

Tax Treatment of Capital Gains and Losses:

Capital gains and losses are categorized as either short-term or long-term based on the holding period of the asset.

Short-term capital gains and losses are generated from the sale of assets held for one year or less, while long-term capital gains and losses result from assets held for more than one year.

The tax rates applied to short-term and long-term capital gains differ, with short-term gains taxed at ordinary income tax rates and long-term gains taxed at preferential capital gains tax rates.

Offsetting Capital Gains and Losses:

Taxpayers have the option to offset capital gains with capital losses to reduce their overall tax liability.

Capital losses can first be used to offset capital gains of the same type (i.e., short-term losses against short-term gains and long-term losses against long-term gains).

If capital losses exceed capital gains in a given tax year, taxpayers can use the excess losses to offset other income, subject to certain limitations.

Harvesting Capital Losses:

Some investors employ a strategy known as tax-loss harvesting to realize capital losses intentionally, particularly toward the end of the tax year.

By selling assets that have declined in value, investors can offset capital gains and potentially reduce their taxable income for the year.

However, investors must be mindful of the wash-sale rule, which prohibits repurchasing the same or substantially identical asset within 30 days before or after the sale to claim the loss for tax purposes.

Objective Question: What type of capital gain results from the sale of assets held for more than one year?  

Answer rating: 100% (QA)

Longterm capital gain This type of capital gain that res... View the full answer