When a person sells a capital asset, if the sales price exceeds the taxpayer's tax "basis" in the property sold then a capital gain is recognized, and if the sales price is less than the taxpayer's tax "basis" in the property sold then a capital loss is recognized.
All capital gains even those on non-business personal property are taxable income, unless there is a specific provision in the law exempting the gain from taxation (e.g. often gains on the sale of one's personal residence is not taxed or is tax deferred). All capital losses are not deductible unless there is a specific provision in the law that makes the loss in question deductible.
A capital asset includes inherited property or property someone owns for personal use or as an investment.
Here are 10 facts that taxpayers should know about capital gains and losses:
Capital Assets. Capital assets include property such as a home or a car. It also includes investment property, like stocks and bonds.
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 and IRS Publication 551.
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 percent. For details, visit IRS.gov.
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.
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.
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.
Long and Short Term. Capital gains and losses are
either long-term or short-term. It depends on how long the taxpayer
holds the property. If the taxpayer holds it for one year or less, the
gain or loss is short-term.
Net Capital Gain. If a taxpayer’s long-term gains are
more than 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
Tax Rate. The tax rate on a net capital gain usually
depends on the taxpayer’s 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.
- Forms to File. Taxpayers often will need to file Form 8949, Sales and Other Dispositions of Capital Assets. Taxpayers also need to file Schedule D, Capital Gains and Losses, with their tax return.
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 how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
Additional IRS Resources:
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