Capital Gains and Losses

Almost everything owned and used for personal or investment purposes is a capital asset.  Capital assets include but are not limited to:  homes, household furnishings, and stocks and bonds. When you sell a capital asset for more than your basis (usually what it cost you), you have a capital gain.  If you sell it for less, you have a capital loss.

You must report all capital gains on a Schedule D.  You may deduct capital losses only on investment property, not on property held for strictly personal use such as a car or a home (unless they qualify as business property).

If you sell the property after owning it for over a year, your capital gain or loss is long-term. If you have held the property a year or less, your capital gain or loss is short-term.

If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce your other income, such as wages, up to an annual limit of $3,000 (or $1,500 if you are married filing separately).  If your total net capital loss is more than the yearly limit, you can carry over the unused portion and treat it as if you incurred it in the next tax year.  If your loss continues to exceed future annual limits, you can continue to carry the excess loss forward to later years. Use the Capital Loss Carryover Worksheet to figure the amount to be carried forward.

The tax rates for net capital gain are generally lower than the tax rates that apply to other kinds of income.  Currently, the capital gains rate for most people is 15%, but may be 0% on some or all of the net capital gain for taxpayers with lower incomes.  Three exceptions to the lower tax rate(s) are as follows:  a gain from selling qualified small business stock is taxed at a maximum 28% rate; net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate; and the capital gain resulting from having to recapture depreciation from the sale of real property may be taxed at up to a maximum of 25 percent.

Additional information can be found at in Publication 550 (Investment Income and Expenses), Publication 544 (Sales and Other Dispositions of Assets), and Publication 523 (Selling Your Home).

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