Capital Gains and Losses – 10 Helpful Facts to Know

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Kyle Goetz CPA ProfileWhen you sell a capital asset, the sale normally results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment. Here are 10 facts that you should know about capital gains and losses:

  1. Capital Assets. Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.
  2. Gains and Losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
  3. Net Investment Income Tax. You must include all capital gains in your income and you may be subject to the Net Investment Income Tax if your income is above certain amounts. The rate of this tax is 3.8 percent. For details, visit IRS.gov.  Kyle Goetz (pictured at right), a tax manager with White Nelson Diehl Evans, noted that for business owners who have decided to sell their businesses this Net Investment Income Tax may be avoided under certain conditions, most notably if they are considered NonPassive owners.  He noted, “It’s imperative that your tax representatives are involved in this process in order to properly plan for every tax eventuality of these transactions.”
  4. Deductible Losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
  5. Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
  6. Carryover Losses. If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.  Kyle stated that it is important with carryover losses that documentation and records of these losses be stored until the entirety of the loses are utilized even if that is beyond the statute of limitations.  He explained, “This will be needed to justify the carry forward losses on future IRS exams and if not may be disallowed.”
  7. Long and Short Term.  Capital gains and losses are treated as either long-term or short-term, depending on how long you held the property. If you held it for one year or less, the gain or loss is short-term.
  8. Net Capital Gain.  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.
  9. Tax Rate.  The tax rate on a net capital gain usually depends on your 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.  Kyle said that gold (bullion, coins, ETFs) is often a popular investment during certain economic climates or simply used as a standard diversification tool.  However, he explained, “The problem is that gold is not treated like marketable securities and instead taxed as a ‘collectible’ which is 28% federal income tax rather than the 20% of marketable securities.”  He continued, “There are alternatives, like miner’s stocks, that would allow an essential investment in gold but still receive the best possible tax treatment of 20%.  This is one item to consider when your financial advisor suggests a gold strategy.”
  10. Forms to File. You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses, with your tax return.

For more information about this topic, see the Schedule D instructions and Publication 550, Investment Income and Expenses. You can visit IRS.gov to view, download or print any tax product you need right away.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Additional IRS Resources:

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