Capital Gains Treatment

The specific taxes assessed on investment capital gains as determined by the U.S. Tax Code. When a stock is sold for a profit, the portion of the proceeds over and above the purchase value (or cost basis) is known as capital gains. Capital gains tax is broken down into two categories: short-term capital gains and long-term capital gains. Stocks held longer than one year are considered long term for the treatment of any capital gains, and are taxed a maximum of 15% depending on the investor's tax bracket. Stocks held less than one year are subject to short-term capital gains at a maximum rate of 35% depending again on the investor's tax bracket.

The huge difference between the short-term and long-term rates makes it clear that paying close attention to the tax consequences of investing in stocks is a critical skill to develop. As an investor's portfolio grows, he or she should increasingly keep track of capital gains, including making adjustments near the end of the calendar year to reduce capital gains taxes as much as possible. An accountant or investment professional can assist in these efforts.