Part 1. Long Term Gain vs. Short Term Gain
When you realize a gain on investment (not a tax-favored retirement account), you will have to pay tax on the gain, how much will depend on your income and how long you held the investment.
If you bought and sold within 12 months, you have a short term capital gain, which will be taxed at your maximum income tax rate. If you are in top 40.8% tax bracket, which incomes a 3.8% Medicare surtax, that will be the tax rate on your gain!
If you wait more than a full year between your purchase and sale, now you qualify for a more favorable long term capital tain rate, which is determined by your taxable income. If you are a high earner with modified adjusted gross income that puts you in the top 23.8% capital gain bracket (includes a 3.8% Medical surtax), that will be the rate you will pay!
At tax time, you match up all of your long term gains against your long term losses, and your short term gains against your short term losses. Then you match any remaining gains against remaining losses to figure your capital gain tax. If you have a net loss, you can deduct up to $3,000 worth from your income. Losses greater than $3,000 can be carried over into the next tax year and future years, until they are used up.
In part 2, we will discuss qualified stock dividends and dividends from foreign stocks.