Capital Gains Primer- Key Terms to Know and Understand

When discussing capital gains, there are a few key terms and phrases you should know in order to truly understand them. Below are eight key phrases usually used when discussing capital gains.

□ Short-Term Capital Gain A gain on an asset that is owned by a taxpayer for one year or less.

□ Long-Term Capital Gain A gain on an asset that is owned by a taxpayer for more than one year.

□ Wash Sale Occurs when a taxpayer sells a stock or security and purchases a substantially identical stock or security within a 30-day period before or after the sale. If it results in a gain, the gain must be realized. If it results in a loss, the loss is temporarily disallowed and the unrecognized loss is added to the basis of the replacement securities.

□ Capital Loss Deduction from Ordinary Income The amount of excess realized capital loss allowed to be deducted from ordinary income, limited to $3,000/year.

□ Capital Loss Carryover The amount of excess realized capital loss than be carried over to use in future years to offset capital gains or deducted from ordinary income.

□ Tax-Loss Harvesting The process of realizing capital losses to offset capital gains (usually occurs near the end of the year).

□ Gifting Stock Giving stock as a gift rather than cash. This allows the giver to avoid paying taxes on the gain. The annual gift tax exclusion is $17,000/recipient in 2023, while the estate tax exemption is $12.92 million in 2023.

□ Charitable Donation of Stock The process of gifting long-term capital gain property. It allows the taxpayer to avoid recognizing a gain on the sale of the asset while being able to deduct the entire fair market value of the property.