Many of the things that are owned by individuals for personal or investment reasons are called capital assets for tax purposes. More and more people are investing in stocks, bonds, mutual funds, precious metals, and other assets to increase their income. Profits earned from the purchase and sale of capital assets are called capital gains. In the United States, the taxes levied on these profits differ, depending on the length of time that a person holds a given asset before selling it. Long term capital gains are gains from assets that were held for more than one year before being sold.
Long term capital gains are taxed at a lower rate than short term capital gains in the United States. Depending on the tax bracket a person is in, their long term capital gains rate may be either five percent or 15%. The reasoning behind the different rates is to provide an incentive for investors to minimize short term, speculative investments, thereby providing better stability in the financial markets and the economy in general.
It is often advantageous for investors to wait to sell an asset until they have owned it for more than a year, thus enabling them to qualify for the lower, long term capital gains tax rate. In light of this fact, it is very important for investors to keep track of their investments, and indeed, much of the tax planning done by investors focuses on taking advantage of opportunities to lower the taxes they pay on profits from their investments.
The taxes on long term capital gains are assessed only on a federal level in the U.S., and are reported on Internal Revenue Service (IRS) Form 1040, Schedule D. Individual states also tax long term capital gains, but they are taxed, in most cases, at the same rate as ordinary income, such as job wages.