When you sell a capital asset such as a home, household furnishings, and stocks and bonds held in a personal account, the difference between the amount you paid for the asset and its sales price is known as a capital gain or capital loss. Here are ten facts you should know about how gains and losses can affect your federal income tax return.
1. Capital Assets. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset including property such as your home or car, as well as investment property, such as stocks and bonds.
2. Gains and Losses. 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. You must report all capital gains on your tax return.
3. Net Investment Income Tax. You may be subject to the Net Investment Income Tax (NIIT) on your capital gains if your income is above certain amounts. The rate of this tax is 3.8 percent.
4. Deductible Losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
5. Limit on Losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return to reduce other income, such as wages. This loss is limited to $3,000 per year or $1,500 if you are married and file a separate return.
6. Carryover Losses. If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.
7. Long and Short Term. Capital gains and losses are treated as either long-term or short-term, depending on how long you held the property. If you hold the property for more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
8. Net Capital Gain. 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 net short-term capital loss, you have a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
9. Tax Rate. The tax rates that apply to net capital gain depend on your income but are generally lower than the tax rates that apply to other income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers, a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain such as unrecaptured Sec. 1250 gains (25 percent) and collectibles (28 percent).
10. Forms to File. You often will need to 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 tax return.