Capital Gains Treatment - 401k Glossary

Capital gains treatment refers to the taxation applicable to profits made from selling investments such as securities, bonds, etc. For example, if you purchase a stock for $400 and sell it 6 months later for $420, you have an investment capital gain of $420 - $400 = $20. Capital Gains Treatment refers to how this $20 is taxed.

Short Term Capital Gains

Stocks and securities that are held for LESS than 1 year are known as short term investments and are assessed a tax rate of a maximum of 35% (depending on the investor's personal tax bracket).

Long Term Capital Gains

Stocks and securities that are held for MORE than 1 year are known as long term investments and are assessed a tax rate of a maximum of 15% (depending on the investor's personal tax bracket).

You might notice that the difference between long term capital gains tax rate of 15% is way way lower than the short term capital gains tax rate of 35%. That's a difference of 20%! Therefore, if you are a short term trader, know that you will be paying a maximum of 35% taxes while if you hold on to your stocks for more than a year, your tax bracket can be reduced by a whopping 20%!