Is Long-Term Worth the Wait and Risk?
Gains from the sale of capital assets such as stocks and other securities held over a year are referred to as long-term capital gains, while those held for shorter periods are called short-term. Long-term gains enjoy special tax treatment while short-term gains are taxed as ordinary income.
It is frequently asked if it is worth the risk holding a security long-term versus cashing in on short-term gain. Of course, no one has a crystal ball that can predict the future performance of a particular stock or the market in general, but we can provide some guidelines that will help you with your risk-reward analysis. The following chart illustrates the difference between short- and long-term capital gains rates and the net savings based on a taxpayer's tax bracket. Keep in mind that your tax bracket is also a function of your total income including the capital gains. Therefore, the larger the gain, the greater the chance you will move into a higher tax bracket.
|
Tax Bracket
|
Short-Term
Rate |
Long-Term
Rate |
Net Long-Term Savings
|
|
10%
|
10%
|
0%
|
10%
|
|
15%
|
15%
|
0%
|
15%
|
|
25%
|
25%
|
15%
|
10%
|
|
28%
|
28%
|
15%
|
13%
|
|
33%
|
33%
|
15%
|
18%
|
|
35%
|
35%
|
15%
|
20%
|
|
39.6%
|
39.6%
|
20%
|
19.6%
|
As an example, suppose you are in the 28% tax bracket and have a potential $10,000 capital gain. The tax for short-term gain is 28% or $2,800. On the other hand, if you held the asset for over a year, the gain would be taxed at 15% or $1,500. Your savings would be $1,300.
Now it is up to you to decide whether the savings of $1,300 is worth the risk of holding the stock until it qualifies as long-term.
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