10 Things You Should Know about Capital Gains (and Losses) This Tax Season

When a person sells a capital asset, the transaction usually results in a capital gain or loss. Capital assets include inherited property or belongings someone owns for personal use or as an investment.

Here are 10 facts you 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.
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 percent.
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 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.
8. 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 gain.
9. 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.
10. 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.

Have a question about capital gains or losses? Give Ellsworth & Associates a call at 513.272.8400. We would be happy to help.