How to Calculate Capital Gains on Long-Term Investments

The IRS requires taxpayers to report and calculate their capital gains on long-term investments on Parts II and III of Schedule D, which is filed each year with Form 1040 by individual taxpayers. Such assets may include real estate, shares of stock, other securities or any other property sold or disposed of by the taxpayer more than one year after it was purchased or otherwise received.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• Schedule D
• Records of long-term capital gains events
• Form 1040

Prepare to Calculate Capital Gains on Long-Term Investments

1. Maintain real-time records of all capital gains events as they occur, with documentation of dates of purchase and sale, purchase price, sales price, and adjustments to basis for improvements, damages and depreciation.
2. Prepare to calculate capital gains by separating long-term investments (which you held for more than one year) from all other investments.
3. Create a spreadsheet or database of your long-term investments which you sold during the year.

Calculate Capital Gains on Long-Term Investments

4. Enter a brief description of each of the long-term investments sold during the year along with the date sold, the date you acquired it and the net sales price.
5. Reduce the gross sales price by any allowable selling expenses, such as advertising costs and commissions, in order to arrive at your actual net sales price for tax purposes.
6. Figure your cost or other basis in each of your long-term investments by adding the cost of improvements and subtracting depreciation and damages.
7. Subtract the cost or other basis from the net sales price to calculate the capital gain or loss for each long-term investment that you sold during the tax year.
8. Post the data from this spreadsheet onto Part II of IRS Schedule D to report your long-term capital gains as part of your tax return.

Tips & Warnings

• Always plan for and estimate the capital gains tax consequences of a sale before you sell an asset, as it may influence your decision about the wisdom of the sale. Long-term capital gains are treated as part of a taxpayer's adjusted gross income and taxed at the same rate as other income, up to a maximum rate that is set legislatively and subject to change.
• Although your long-term capital gains are treated as ordinary income, there is an annual limitation of $3,000 ($1,500 if married filing separately) on the amount of capital losses that you can apply in any single tax year to reduce your adjusted gross income. Amounts exceeding this limitation can be carried over to future tax years.