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02.22.21

What are capital gains and losses?

BY , Income Tax Department

When you sell a capital asset you typically generate a capital gain or loss. Below are some of the basics on what capital gains and losses are, how they're calculated, and their tax implications.

Capital Assets. Capital assets include investment property, such as stocks and bonds, as well as personal use property, such as your home or car.

Capital Gains and Losses.A capital gain is generated when you sell a capital asset for more than your basis in it, which is usually what you initially paid for it. A capital loss is generated when you sell a capital asset for less than your basis in it.

Short- and Long-Term.A short-term capital gain or loss results from the sale of a capital asset that is held for one year or less. A long-term capital gain or loss results from the sale of a capital asset that is held for greater than one year.

Net Capital Gains and Losses. Short-term capital gains and losses are aggregated separately from long-term capital gains and losses to arrive at a net short-term capital gain or loss and a net long-term capital gain or loss. If there is a net short-term loss and a net long-term gain, or vice versa, they are offset against each other. However, if there is both a net short-term capital gain and a net long-term capital gain, the two will be kept separate, and the net short-term gain will be taxed at ordinary income rates, whereas the long-term gain will be taxed at the long-term capital gains rates listed within the "Tax Rates" bullet below.

Deductible Losses.Capital losses from investment property are deductible, but capital losses from personal use property are not.

Limit on Losses. Net deductible capital losses are limited to $3,000 annually, or $1,500 if you are married and file a separate return. Any net capital losses that exceed that threshold can be carried over indefinitely and used to offset capital gains on tax returns in future years until they are fully exhausted.

Tax Rates.Short-term capital gains are taxed at your ordinary personal income tax rates. Long-term capital gains are generally taxed at a rate of zero, 15, or 20 percent depending on your income level. A 25 or 28 percent tax rate can also apply to certain types of capital gains (e.g., collectibles).

Net Investment Income Tax. An additional tax of 3.8% may apply to your net capital gains depending on your income level.

Reporting.Capital gains and losses related to investments are generally reported to you on Form 1099-B, a Schedule K-1, or a consolidated 1099. You should then report those capital gains and losses on Schedule D and Form 8949 as part of your personal federal tax return.

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Author

Christopher F. Caldwell, EA

Professional Specialist

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