Economics becomes a science · 1770s–1920s
1921
Capital gains get their own rate, and the wash sale rule
The US taxes long-held investments at a lower rate and blocks fake losses.
The Revenue Act of 1921 taxed gains on assets held over two years at 12.5%, below the top income tax rate. The same year, Congress stopped investors claiming a loss when they sold and quickly bought the same shares back: the wash sale rule.
Laws of the same years first let losses carry over to reduce tax in later years. Today US investors can use up to $3,000 a year of net losses against other income, a limit set in 1978, and carry the rest forward.
💡 Why it made sense then
High wartime tax rates made people hold on to investments rather than sell, and some sold at a loss only on paper to cut their tax.
Ideas it gave us
- 🧮 Capital gains tax
Capital gains tax is tax on the profit from selling an investment for more than you paid. In the US, gains on assets held over a year are taxed at lower long-term rates (0%, 15% or 20%) than short-term gains, which are taxed as income.
- 📈 Capital gain
A capital gain is the profit from selling an investment for more than you paid for it; selling for less is a capital loss.
- 🧮 Wash sale rule
The wash sale rule stops you from claiming a tax loss if you buy the same or a substantially identical investment within 30 days before or after selling it at a loss. The loss is added to the new shares' cost basis instead.
- 🧮 Tax loss carryforward
A tax loss carryforward lets you use an investment loss you couldn't use this year to cut your taxes in later years.
Practise with $10,000 in play money
Free. No real money involved.