One tax topic we discuss with clients each year is the treatment of their capital gains and losses. Much of what you own is a capital asset including a home, personal use items like household furnishings, and stocks or bonds held as investments. Most people buy and sell assets without ever considering the tax consequences at the time.
To help you better understand capital gains and losses, here are 10 facts everyone should know:
- Almost everything you own and use for personal or investment purposes is a capital asset.
- Capital gain or loss is the difference between your basis and the amount you receive when you sell that asset. Basis is typically what you paid to purchase the asset.
- You can deduct losses on the sale of investment property but not on the sale of personal-use property.
- Capital gains and losses are either short-term (owned less than 1 year) or long-term.
- You must include all capital gains in your taxable income.
- 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.
- If you have a net capital loss, you are limited to deducting $3,000 per year if you file as married filing jointly and $1,500 if you file separately or are single.
- You may carry excess losses over to the next year.
- Capital gains and losses for nonbusiness assets are reported on Form 8949 and summarized on Schedule D.
- Tax rates on capital gains are typically lower than ordinary income tax rates.
This is a short summary of the topic. If you are interested in more information about capital gains and losses, see IRS Publication 550 and the Schedule D instructions or contact your accountant.
