If I have $1000 in long-term capital gains, another $1000 in
short-term capital gains, and say $1500 in short-term trading
losses. That's a net gain of $500. At what rate is that taxed?
Long-term short-term or neither? Thanks

Hi atr-ga,

The $500 gain would be taxed at the rate for long-term capital gains.

The way it works is that first, you calculate the net short-term gain
or loss and separately, the net long-term gain or loss.  In your case,
there is a short-term net loss of $500 and a long-term net gain of
$1,000.  Then you combine these for a net capital gain of $500. 
Because the $1,000 is more than the $500, it's taxed at the favorable
capital gain rate.  In effect, you deduct the net short-term capital
loss from the long-term capital gain and what's left is still a
long-term capital gain, and is taxed accordingly.  More generally,
whichever number has the larger magnitude, whether positive or
negative, determines whether the final net gain or loss is treated as
short-term or long-term.

The clearest explanation of this calculation I found was on a page
from The Investment FAQ.

http://invest-faq.com/articles/tax-cap-gains-rates.html

SmartMoney.com's Tax Guide page on "Tallying Your Capital Gains and
Losses" has a table with the same conclusion:  "If long-term gain
exceeds short-term loss, the net gain is considered a long-term gain
and taxed at favorable rates."

http://www.smartmoney.com/tax/capital/index.cfm?story=nettingrules

The Internal Revenue Service's Tax Topic 409 on Capital Gains and
Losses is consistent with the other answers, though less explicit.

http://www.irs.gov/taxtopics/tc409.html


If this is not clear or you need any further information, please ask
for a clarification, and I will do my best to help.

--efn

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Request for Answer Clarification by atr-ga on 28 Aug 2004 09:14 PDT

I hope I'm not stretching my $2 bucks too far... But after reading
your answer and the links, I was left with another question: What
is the point of making a distinction between long-term losses and
short-term losses? It seems they're always treated the same: first,
offsetting gains of either type, then, offsetting other income, and
finally, carrying over to the next year. Anything obvious I'm
missing here? Thanks.

---

Clarification of Answer by efn-ga on 28 Aug 2004 10:44 PDT

In the case in your question, short-term and long-term losses do have
exactly the same effect of reducing the net gain.  But in other cases,
it makes a difference whether a loss is short-term or long-term.  In
general, it's important to keep the short-term and long-term net
amounts separated because short-term and long-term net gains are taxed
at different rates, and you can't get the short-term and long-term net
amounts with separating short-term and long-term losses.

Here's an example of a case where it matters whether a loss is
short-term or long-term.  Say you have a short-term gain of $10,000, a
long-term gain of $10,000, and a loss of $5,000.  If it's a short-term
loss, the $5,000 net short-term gain is taxed at the rate for ordinary
income, while the $10,000 net long-term gain is taxed at the favorable
rate for capital gains, whereas if the loss is long-term, you pay at
the ordinary rate for the short-term gain of $10,000 and at the
capital gains rate for the long-term gain of $5,000.

Since I forgot it before, I will throw in the standard disclaimer that
Google Answers does not provide professional tax advice.

I hope this answers your question.  If not, feel free to clarify your
question and ask for more clarification of the answer.

-efn

Thanks!