Amount Realized

finance a la shmoop what is ordinary income versus long-term gain income ah

tax policy it changes like the seasons if the seasons were always mean and [Seasons of the year appear]

nasty well generally speaking throughout modern US tax history there have been

two types of taxes those levied on your wages or personal income that you [US tax types appear]

actively earned usually at a relatively high tax rate and those taxes levied on

gains from investments or passive income you know like stocks that went up and

then we're sold for cash or land that was bought cared for appreciated in [Land stamped with sold]

value and then sold for cash well the two big keys in differentiating these

concepts revolve around a the type of income that's coming in I heat if you

hauled bricks to earn the money it's ordinary actively earned income [Bricks land into wheelbarrow]

plain-vanilla work-related and be that money can be made from investment gains

and there's a curveball here in that if the gains were realized or the [Man hit by a baseball]

investment was turned into profits in the form of cash I eat you sold the land

for cash not in barter for another piece of land and you did it in less than one

year after buying it well then the tax rate applied will be the ordinary income [Tax rate table appears]

level the higher level in part because well if you turned it into profits so

quickly well the government figures it was kind of your job and you were

working it pretty hard in that less than one year time period and so you actively

earned the money and to punish you for working hard they tax you at a higher

rate like the brick hauling ordinary income is earned rather than passive [Bricks falling and dollar signs appear]

long term investing gains the differences can be massive in a blue

state the marginal ordinary income rate post Trump hovers somewhere a bit beyond [Blue states appear in US]

50 percent assuming no incremental city tax piled on top hello Manhattan we're

looking at you the long-term gain rate hovers around 25 percent and in a red

state with a no state tech long-term gain hovers around 20 percent and change

there's Obamacare thrown in there so on and so if you had a gain of a

million bucks on a security you've held 364 days and you sell it that day while

you keep a bit less than 500 grand if you wait another day or two before

selling while you keep more like 750 grand from that million yeah it's a

delta of a quarter of your entire investment courtesy of qualifying for

long-term gain treatment rather than short-term so just like the conclusion [A corvette appears]

of a really good Saturday night you always want to try to go long-term in

instead of short