What happens if you have long term gains and short term losses? For example, if someone had $10k in LT gains and $6k in ST losses.

Do you pay LT cap gains on all $10k (15% tax), $3k credit on ST cap losses (35% tax), then carry over the additional $3k into 2006? Or do you net them out, paying LT cap gains on $4k?

BBQ
a little confused this tax season


BBQ,

You net the short term capital losses against the long term capital gains leaving you with $4k in net longterm capital gain. If you have a net capital loss carry forward from last year, you can further reduce the long term capital gain by the amount of the cary forward. If the carry forward is more than $4k, you can eleminate the $4K longterm capital gain and take a loss of up to $3K against ordinary income.

If you don't have a capital loss carry forward from last year, you have a $4K long term capital gain. Long term is important because, as you probably know, it's taxed at a max rate of 15%. If your gain was short term it would be added to your ordinary income and taxed at your ordinary taxable income rate - up to 35%, depending on your taxable income.

Hope this helps.