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Author: gullifool One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: long/short term capital gains Date: 12/13/1999 8:36 PM
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> I was reading on one of the portfolios that when stock is sold
> when held less than a year, it's taxed at a person's normal tax
> rate. I thought when it was sold less than a year, it could be
> taxed at 28%? I don't know why I think that, it was just stuck in
> my head - less than a year - 28%, more than a year - 20%. Can
> somebody clear this up for me? Thanks, Chris

The normal tax rates are 15%, 28%, 31%, and up. These rates are based upon your taxable income, which is your gross income plus something things and minus deductions and exemptions and other things.

One year happens to be the break point at which an investment is defined as "short term" or "long term". Hold the stock < 1 year, your gain or loss is short term. Hold it > 1 year, your gain or loss is long term. To encourage people holding onto their investments, long term rates are lower than short term rates.

Most average people likely to be reading investment material will fall into the 28% bracket, or perhaps a higher one. 28% just happens to be the most common in their audience, so it's often used as the "example" rate. If you're in the 28% regular (normal) tax bracket and have long term capital gains (LTCG), then your gains are taxed at only 20%. If you didn't hold it for a year, you have short term capital gains (STCG) taxed at your regular rate of 28%.

If your tax rate is 15%, obviously a long-term rate of 20% isn't very attractive. So in that case, the tax rate on LTCG will be only 10%. If you didn't hold it for a year, you have STCG and those are taxed at your regular (normal) rate which is 15%.

If you're in the higher brackets of 31 and 39%, then holding your gains until they are long term and taxed at 20% can make a big difference in how much you net from that transaction.

Clear as mud?

G.


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