IS LONG-TERM WORTH THE WAIT AND RISK?

On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.

Gains from the sale of capital assets such as stocks and other securities held over a year are referred to as long-term capital gains, while those held for shorter periods are called short-term. Long-term gains enjoy special tax treatment while short-term gains are taxed as ordinary income.

It is frequently asked if it is worth the risk holding a security long-term versus cashing in on short-term gain. Of course, no one has a crystal ball that can predict the future performance of a particular stock or the market in general, but we can provide some guidelines that will help you with your risk-reward analysis. The following chart illustrates the difference between short- and long-term capital gains rates and the net savings based on a taxpayer’s tax bracket. Keep in mind that your tax bracket is also a function of your total income including the capital gains. Therefore, the larger the gain, the greater the chance you will move into a higher tax bracket.

Tax Bracket	Short-Term Rate	Long-Term Rate	Net Long-Term Savings
10%	10%	0%	10%
15%	15%	0%	15%
25%	25%	15%	10%
28%	28%	15%	13%
33%	33%	15%	18%
35%	35%	15%	20%
39.6%	39.6%	20%	19.6%

As an example, suppose you are in the 28% tax bracket and have a potential $10,000 capital gain. The tax for short-term gain is 28% or $2,800. On the other hand, if you held the asset for over a year, the gain would be taxed at 15% or $1,500. Your savings would be $1,300.

Now it is up to you to decide whether the savings of $1,300 is worth the risk of holding the stock until it qualifies as long-term.