Capital Gains Tax Relief

Capital gains can qualify for lower tax rates than ordinary income. But only sometimes. To qualify for lower rates, individuals usually must wait a minimum holding period before selling their investments.

Before 1997's tax legislation, that holding period was "more than one year" and the lowest capital gains rate was 28%. (Individuals in the 15% regular tax bracket also paid tax on their capital gains at 15%.) These rules applied to all types of investments. The 1997 law introduced new, lower rates (20%/10%) on capital gains and a longer holding period (more than 18 months) needed to qualify. The 28% rate still applied to gains on investments held more than one year but not more than 18 months. To further complicate matters, the law added special rules for collectibles and depreciable real estate.

In a surprising about-face, Congress decided to simplify matters. Included in the IRS Restructuring and Reform Act of 1998 are provisions that do away with the more-than-18-month holding period, generally retroactive to January 1, 1998. The chart outlines the new rules.

1998 Investment Sales -- If Holding Period Exceeds One Year

Type of Investment		Top Tax Rate on Capital Gain

Securities (e.g., mutual fund shares, stocks, bonds)		20% except 10% if gain otherwise taxable in 15% bracket

Collectibles (e.g., artwork, antiques, stamps, coins)		28%

Real Estate		20% except 25% to the extent of prior depreciation
Gains on investments that have been held one year or less are taxed at the investor's regular tax rate.

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