Legal Definitions - long-term capital gain

A long-term capital gain refers to the profit an individual or entity makes from selling an asset that they have owned for more than one year. This profit is the difference between the asset's selling price and its original purchase price (plus any costs associated with buying or improving it). The "long-term" distinction is crucial because, in many tax systems, these gains are taxed at a lower rate than ordinary income, such as wages or short-term capital gains.

Here are some examples to illustrate this concept:

• Example 1: Sale of an Investment Property

  Imagine Sarah purchased a rental condominium in January 2019 for $250,000. She held onto the property, renting it out for several years, and then decided to sell it in March 2023 for $350,000. After accounting for selling costs, her net profit is $90,000. Since Sarah owned the condominium for over four years (more than one year), the $90,000 profit she realized from the sale is considered a long-term capital gain. This gain would likely be subject to a preferential tax rate compared to if she had sold it within a year of purchase.

• Example 2: Selling Shares of Stock

  David invested in a technology company's stock, buying 1,000 shares at $50 per share in June 2020. He held these shares as the company grew, and in August 2023, he decided to sell all 1,000 shares at $85 per share. David's total profit from this transaction is ($85 - $50) * 1,000 = $35,000. Because he owned the shares for over three years (more than one year) before selling them, the $35,000 profit is classified as a long-term capital gain. This classification means it will be taxed at the applicable long-term capital gains rate.

• Example 3: Sale of a Collectible Item

  Maria bought a rare antique vase at an auction in October 2017 for $5,000. She displayed it in her home for several years. In November 2022, she decided to sell the vase to a collector for $12,000. Her profit from the sale is $7,000. Since Maria owned the vase for over five years (more than one year) before selling it, the $7,000 profit she made is a long-term capital gain. While collectibles often have specific tax rules, the "long-term" aspect still applies due to the holding period, distinguishing it from a short-term gain.