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Lesson 9. Taxes and Options > Tax Terms - Pg. 43

Taxes and Options 43 Capital Gains Capital gains (and losses) refer to the sale for a profit or a loss of a capital asset. For our purposes, this specifically refers to the stock you acquired through an employee stock option plan. There are two types of capital gains or losses: long-term and short-term. The calendar decides which is which. If you hold stock for more than one year (at least a year and one day) and sell it for a profit, that is a long-term gain. Any stock sold before the year and one-day limit is a short-term gain. Tip You should keep careful records on all your employee stock option transactions. Timing is crucial. Why is this important to know? The long-term capital gains tax rate is 20 percent (10 percent if you are in the 15 percent tax bracket). The short-term capital gains tax rate is the same as ordinary income. For a person in the top tax brackets this can be significant, as we see later in this chapter. However, even persons of modest means can benefit by taking advantage of capital gains treatment. You can generally use long- and short-term capital losses (in other words, selling your stock at a loss) to offset capital gains. See your tax professional for specific advice. Tax Bracket Tax brackets and how they relate to what you actually pay in taxes is a misunderstood topic. I'll try to make sense of it for you. Individual taxpayers are assessed taxes on the amount of taxable ordinary income they have in the