If you hold an investment for more than one year, you qualify for long-term capital gains tax treatment. This is an advantage to you that leaves more cash in your pocket because the long-term capital gains tax rate paid on investments such as bonds
, and mutual funds
is lower than most other tax rates.
- Low Capital Gains Tax Bracket: Tax payers in the 10% and 15 tax brackets will pay only 5% on profits earned from long-term capital gains. For investments bought between 2008 and 2010, they will pay zero percent - that's right, 0%, or absolutely nothing.
- High Capital Gains Tax Bracket: Tax payers in the 28%, 33%, and 35% tax brackets pay only 15% in capital gains taxes.
Potential Changes in the Long-Term Capital Gains Tax Rate
President Obama's budget calls for the lower long-term capital gains tax rates to sunset and expire. If this is permitted, the tax rates will go back to their pre-2003 level, which is 20% on all long-term profits.
Why the Long-Term Capital Gains Tax Rate Is Different than Short-Term Capital Gains Tax Rate
The reason for this capital gains tax rate structure is simple. The United States government wants to encourage long-term investment in our nation's economy. This treatment of long-term capital gains versus regular taxable income makes profits from investments more attractive than profits from actively working. Although it may seem unfair that a well-heeled, white-collar investor pays a lower tax on profits earned from selling shares of stock than a hardworking plumber, the theory behind it is that the money put to work in the business by the investor is going to create, ultimately, far more jobs because it will be used by the company in which he invested to build new factories, hire new secretaries, managers, executives, and mail room clerks, paint the walls, install new phone lines, launch new products, and much more. If the capital gains tax rates were higher for long-term investors, they would most likely ship cash outside of the country and invest in more friendly countries. This phenomenon is known as "flight of capital".