Difference Between Short Term vs Long Term Capital Gains
What are “Gains”?
“Gains” is a term used for any profit realized from an asset or a transaction.
A “capital gain” is profit realized from the sale of a Capital asset.
A “short term gain” is again realized from the sale of a capital asset after holding it for a year or a lesser period.
Similarly, a “long term gain” can be defined as any gain realized from the sale of a capital asset upon holding it for longer than a year.
For example, Mr. Joe bought 100 stocks of ABC Corporation at $10.00 each, and after 6 months when he determined that markets were good to sell the stocks, he sold them off at $12.00 each. Thus, he made a short term capital gain of $2.00 per stock (or $200.00 on the whole).
Similarly, consider this example, Ms. Jane bought gold in 2012 worth $3,000.00. She held it for 3 years and then sold it off in 2015 for $3,800.00 (with market levels higher than in 2012). As the holding period was more than a year, the profit of $800.00 shall be called as a long term capital gain.
However, before actually calculating the exact amount of gains, there are some charges which need to be deducted from the realized returns, like:
- brokerage fees (if any), incurred as part of the transaction;
- administrative costs of stationary (and/or stamping if legal formalities involved);
- attorney costs (if any);
- any other expenses directly related to such transaction.
One exemption is, if the asset is acquired by inheritance, as a gift or from a will, the asset is simply transferred (and not sold) to the person acquiring it. Hence there is no capital gain. However, when the receiver wishes to sell the asset, the holding period is calculated from the date that the original holder of such asset purchased the same. The type of gain (Short Term vs Long Term Capital Gains) is thereby determined.
Short Term vs Long Term Capital Gains Infographics
Below is the top 7 difference between Short Term and Long Term Capital Gains
Key Differences Between Short Term vs Long Term Capital Gains
Both Short Term vs Long Term Capital Gains are popular choices in the market; let us discuss some of the major Difference Between Short Term and Long Term Capital Gains:
- Both the types of Short Term vs Long Term Capital Gains require the underlying capital asset to be sold off. Unless the asset is sold off, the realized profit cannot be called as a capital gain.
- In any case, short term vs long Term Capital Gains, the seller (or the profit maker) has to pay taxes to the government. However, the rate of taxation on different transactions may be different depending upon nature and other factors.
- Both types of Short Term vs Long Term Capital Gains can be calculated for similar types of capital assets – the only difference being the tenure for which the asset is held. It may although be an inherent quality of a few types of assets to be held for a longer period (like real estate, gold or machinery), however, cannot be generalized.
Head To Head Comparison Between Short Term vs Long Term Capital Gains
Let us make a comparative study to understand comparison Between Short Term vs Long Term Capital Gains
| Short Term Capital Gains | Long Term Capital Gains |
| The asset is held for a period of one year or lesser and then sold off. | The asset is required to be held for a period longer than a year and then sold off. |
| Generally, for easily tradable and liquid assets like stocks, bonds, treasury bills or money market instruments. | Capital assets that help in long-term gains include all types – liquid and easily tradable, plus other long-term assets (for example, real estate, gold /other precious commodities, long-term securities, machinery, etc). |
| More liquid assets are bought with a short-term favorable market view, such that selling within shorter span can be done and profits realized. | For such type of gain, the buyer keeps a long-term view of markets, such that he is returned with very good profits upon selling the asset. |
| Profits may be lesser than long-term gains, since the holding period is small, and the asset may or may not have really grown well into the markets, yet will bring certain profits to the seller. | As the holding period is more than a year, the profits to be realized are expected to be more than short-term gain. |
| Involves lesser risk than if held for longer than a year. | Riskier to other short-term assets, since the waiting period, can be very big, and the asset may turn out to be illiquid later. |
| Short Term capital gain tax rates as per Indian Income Tax Act, are the same as the income tax for the individual. Such gain gets added to the income tax return to be filed by the taxpayer. | All long-term capital gains attract a tax rate of 20.0% plus cesses. However, as the holding period, in this case, is longer than short-term, the Indian Income Tax Act provides some benefits – any long-term capital gain of more than 1.0 lac on the sale of equity assets shall be charged @10.0%. |
| Taxes to be paid for short-term capital gain may be reduced by including short-term capital losses within the same year. | A long-term capital gain has tax rates fixed by law. As per IRS, long-term capital gains are charged as:
Income Bracket Tax Rate 10.0% – 15.0% 0.0% 25.0% – 35.0% 15.0% More than 39.6% 20.0% |
Taxation rules over the capital gains may differ based on different laws of other countries, and the determination of capital assets may also vary from one land to another. Hence it may be incorrect to generalize any rules that relate to legal bindings without mentioning a particular context.
However, the basic understanding along with similarities and difference between Short Term vs Long Term Capital Gains is that the types of assets remain quite the same.
Short Term vs Long Term Capital Gains – Final Thoughts
Although long term transactions seem attractive by the profits earned with lower tax rates, one needs to analyze if it is really fruitful to hold the asset for longer than a year. If the markets are not supportive, it may be wiser to come out of the buy position of any such asset and realize the best profits possible.
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This has a been a guide to the top differences between Short Term vs Long Term Capital Gains. Here we also discuss the Short Term vs Long Term Capital Gains key differences with infographics, and comparison table. You may also have a look at the following articles –
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