In what order are capital gains and losses considered for tax purposes?

For tax purposes, capital gains and losses are considered in a specific order to determine the net gain or loss that will be subject to tax. The correct order starts with short-term losses, then long-term losses, followed by long-term gains and finally short-term gains.

This order is crucial because it impacts the overall tax liability. Short-term capital gains (gains on assets held for one year or less) are typically taxed at higher ordinary income rates, while long-term capital gains (gains on assets held for more than one year) benefit from lower tax rates. By applying short-term losses first, investors can offset their short-term gains, thus reducing their tax burden at the higher ordinary income tax rate. Following with long-term losses to offset long-term gains helps to further minimize taxable amounts.

It's important to note that if losses exceed gains in each category, the remaining losses can offset gains in the opposite category, but this is secondary to the initial order of offsetting gains with losses. Therefore, understanding this order is essential for effective tax planning and filing.