When a person sells a capital asset, the sale normally results in a capital gain or loss. A capital asset includes inherited property or property someone owns for personal use or as an investment.
Below are 10 important facts that taxpayers should know about capital gains and losses:
1. Capital Assets
Capital assets include property such as a home or a car. It also includes investment property, like stocks and bonds.
2. Gains and Losses
A capital gain or loss is the difference between the basis and the amount the seller gets when they sell an asset. The basis is usually what the seller paid for the asset.
For details about inherited property, see:
- IRS Publication 544
- IRS Publication 550
- IRS Publication 551
3. Net Investment Income Tax
Taxpayers must include all capital gains in their income. Capital gains may be subject to the Net Investment Income Tax if the taxpayer’s income is above certain amounts. The rate of this tax is 3.8%.
For details, visit IRS.gov.
4. Deductible Losses
Taxpayers can deduct capital losses on the sale of investment property but can’t deduct losses on the sale of property they hold for their personal use.
5. Limit on Losses
If a taxpayer’s capital losses are more than their capital gains, they can deduct the difference as a loss on their tax return.
This loss is limited to:
- $3,000 per year, or
- $1,500 if married and filing a separate return.
6. Carryover Losses
If a taxpayer’s total net capital loss is more than the limit they can deduct, they can carry it over to next year’s tax return.
7. Long and Short Term
Capital gains and losses are classified as either long-term or short-term.
It depends on how long the taxpayer holds the property:
- One year or less: Short-term
- More than one year: Long-term
8. Net Capital Gain
If a taxpayer’s long-term gains exceed their long-term losses, the difference between the two is a net long-term capital gain.
If the net long-term capital gain is more than the net short-term capital loss, the taxpayer has a net capital gain.
9. Tax Rate
The tax rate on a net capital gain usually depends on the taxpayer’s income.
Key points about the tax rate:
- The maximum rate is 20%.
- Most taxpayers will pay 0% or 15%.
- A 25% or 28% rate may apply to certain types of net capital gain.
10. Forms to File
Taxpayers often will need to file:
- Form 8949 – Sales and Other Dispositions of Capital Assets
- Schedule D – Capital Gains and Losses, with their tax return
For more information, see the Schedule D instructions. Taxpayers can visit IRS.gov to get tax forms and documents anytime.
Additional Tip
All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity.
Taxpayers can learn more about verifying their identity and electronically signing tax returns at Validating Your Electronically Filed Tax Return on IRS.gov.
Frequently Asked Questions
What is considered a capital asset?
A capital asset includes property you own for personal use or as an investment, such as your home, car, stocks, or bonds. It also includes inherited property.
How do I calculate a capital gain or loss?
A capital gain or loss is the difference between what you paid for the asset (your basis) and what you received when you sold it. Gains must be reported; certain losses may be deductible.
Can I deduct losses from selling personal property?
No, losses from the sale of personal-use property (like your home or car) are not deductible. Only investment property losses qualify for deduction.
What is the maximum amount of capital loss I can claim on my tax return?
You can claim up to $3,000 of net capital losses per year ($1,500 if married filing separately). Excess losses can be carried over to future years.
What forms do I need to report capital gains and losses?
You typically need to file Form 8949 and Schedule D with your tax return to report capital asset sales and determine your capital gain or loss.