Difference between Long-Term vs Short-Term Capital Gains
When an investor earns a profit on the sale of assets such as Real estate, stocks, bonds or Mutual funds, it’s called as Capital gains. This is considered as Taxable income and the amount of such tax primarily depends on 2 factors:
- Income of the investor
- The time period for which the asset has been held
Head To Head Comparison (Infographics)
Below is the top 5 difference between Long Term vs Short Term Capital Gains
Key Difference between Long-Term vs Short-Term Capital Gains
Both Long-Term vs Short-Term Capital Gains are popular choices in the market; let us discuss some of the major Differences Between Long-Term vs Short-Term Capital Gains:
- Long-term Capital gains are those arising out of the transfer of a long-term capital asset from an individual whereas a short-term capital gain is created by the transfer of a short-term capital asset.
- In the case of a financial asset, the holding period applicable for long-term capital gain is greater than 12 months and in respect of short-term capital gain, it is less than 12 months.
- The long-term capital gain for capital assets is applicable if it is held for more than 24 months in case of immovable property and 36 months in case of movable ones. On the other hand, a short-term capital gain for immovable properties is applicable if it’s held for less than 24 months and 36 months in case of movable ones.
- Long-term gain can be taxed at 0%, 15%, 20% depending on the income tax bracket one falls into. Exceptions by the government may also be required to factor in. Short term gain is taxed at the same rate as the ordinary income.
- If one has any offsetting losses in the same year it can be offset against capital gains. However, firstly all the short-term losses have to be offset against the short-term gains and the long-term losses against long-term gains. If there is still any excess, such as having a net long-term gain and a net short-term loss, the extra short-term losses can be used for offsetting against the long-term gains.
- In the case of inherited assets especially real estate, the profits are always considered as long-term gains. Special tax provisions are provided by respective governments for the same. However, if the property is received as a gift, one can include the donor’s holding period to self but not automatically considered a long-term gain.
- The formulas are:
- STCG (Short-term Capital Gain) = Full Value of Consideration – (Cost of Acquisition + Cost of Improvement + Cost of Transfer)
- LTCG (Long-Term Capital Gain) = Full value of Consideration – (Indexed Cost of acquisition + Indexed Cost of Improvement + Cost of Transfer)
Let us consider the following examples:
For instance, if Mr. A purchased Gold for INR 4 Lakhs and sold it for INR 5 Lakhs for the year of 2017, the STCG would be:
The importance of below terminologies should also be noted:
Full Value of Consideration: Amount or consideration received by the seller on transfer/selling the asset
Expenditure Incurred: Expense incurred in transferring the asset like brokerage or fee.
4.8 (2,219 ratings)
Cost of Acquisition: The amount for which asset was acquired
Cost of Improvement: Expenses incurred for improvising the asset
Indexed Cost of Acquisition =
Indexed Cost of Improvement =
There are various exemptions defined as per the respective Income Tax act and accordingly has to be considered.
Long-Term vs Short-Term Capital Gains Comparison Table
Below is the 5 topmost comparison between Long-Term vs Short-Term Capital Gains
|Basic Comparison between Long-Term vs Short-Term Capital Gains||Long-Term Capital Gain||Short-Term Capital Gain|
|Meaning||Transfer of long-term capital asset from an individual.||Profits arising on the transfer of the short-term capital asset.|
|Holding Period (Financial Asset)||Greater than 12 months.||Less than 12 months.|
|Capital Asset||Greater than 24 months for immovable property and 36 months for movable property.||Less than 24 months for immovable property and 36 months with respect to movable ones.|
|Tax rate||Depends on the income bracket.||Similar to a rate of ordinary income.|
|Offsetting losses||Offset on a secondary basis.||Offset first against short-term gains.|
This has been a guide to the top differences between Long-Term vs Short-Term Capital Gains. Here we also discuss the Long-Term vs Short-Term Capital Gains key differences with infographics, and comparison table. You may also have a look at the following articles –
- Benefits Of Litecoin and Ethereum
- Differences Between Mutual Fund vs Exchange Traded Fund
- Proprietary Trading| What is Proprietary Trading
- Steps of Financial Planning Success
- Bitcoin vs Ethereum – Best 4 Differences
- Stocks vs Bonds Differences (With Infographics)
- Amazing features of Stocks vs Mutual Funds
- Capital Gain FormulaCalculator (Examples with Excel Template)