Capital Gains and Losses and Your Tax Return

When you own certain kinds of assets and you sell them, you may incur a capital gain or loss that is applicable to your income tax preparation.  If the original purchase price plus applicable expenses associated with the asset (known as the basis) is less than the proceeds that you receive from the sale of the asset, you have incurred a capital gain.  On the other hand, if the basis of your asset is greater than the proceeds from the sale, you have incurred a capital loss.

Capital gains are taxable to you, using a separate tax rate – and capital losses can be deducted from your capital gains for the year.  Excess capital losses (above your capital gains for the year) can be used to reduce your income by up to $3,000 per year, carried forward until used up (or for your lifetime).

The IRS recently produced their Tax Tip 2014-27 which lists ten facts about capital gains and losses that you may find useful as you prepare your tax return.  The text of the actual Tip is below:

Ten Facts about Capital Gains and Losses

When you sell a ‘capital asset,’ the sale usually results in a capital gain or loss.  A ‘capital asset’ includes most property you own and use for personal or investment purposes.  Here are 10 facts from the IRS on capital gains and losses:

1. Capital assets include property such as your home or car.  They also include investment property such as stocks and bonds.
2. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset.  Your basis is usually what you paid for the asset.
3. You must include all capital gains in your income.  Beginning in 2013, you may be subject to the Net Investment Income Tax.  The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts.  For details see www.IRS.gov/aca.
4. You can deduct capital losses on the sale of investment property.  You can’t deduct losses on the sale of personal-use property.
5. Capital gains and losses are either long-term or short-term, depending on how long you held the property.  If you held the property for more than one year, your gain or loss is long-term.  If you held it one year or less, the gain or loss is short-term.
6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain.  If your net long-term capital gain is more than your short-term capital loss, you have a ‘net capital gain’.
7. The tax rates that apply to net capital gains will usually depend on your income.  For lower-income individuals, the rate may be zero percent on some or all of their net capital gains.  In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent.  A 25 or 28 percent tax rate can also apply to special types of net capital gains.
8. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return.  This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate tax return.
9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return.  You will treat those losses as if they happened that year.
10. You must file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses.  You also need to file Schedule D, Capital Gains and Losses with your return.

For more information about this topic, see the Schedule D instructions and Publication 550, Investment Income and Expenses.  They’re both available on www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).