Capital assets can take various forms, including stocks, bonds, property and equipment. If you sell a capital asset for more than you paid for it, you will owe capital gains tax at the end of the year. You must also pay taxes on capital gains from the sale of personal property such as televisions and furniture.
Step 1: Short-Term vs. Long-Term Assets
Separate your portfolio into short-term capital assets and long-term capital assets. Long-term assets are those you owned for at least one year before selling them. The tax rate is lower for long-term capital gains. Short-term capital gains are taxed at the same rate as your ordinary income.
Step 2: Calculate the Cost Basis
Calculate the cost basis for each asset you sold during the tax year. Start with the asset's original purchase price. Add any extra costs involved in purchasing the asset, such as shipping and handling, sales tax, excise taxes, import fees, installation and setup fees. If you made any improvements to the asset that would increase its value, add the improvement cost to the basis.
Step 3: Determine Your Gain or Loss
Subtract the basis from the sale price to find your capital gain or loss on the transaction. If you sold the asset for less than the basis, you will have a capital loss for the year. You can use your capital losses from investments to reduce your gains from investments and up to $3,000 of other types of income. Any losses over this amount may be carried over to a future tax year.
Step 4: Reporting Capital Gains Tax
Complete IRS Form 8949 to report your capital gains and losses. Report your short-term assets in Part I of the form and your long-term assets in Part II. List the purchase date, sale date, sale price and cost basis for each asset on a separate line. Transfer the totals from Form 8949 to Schedule D of Form 1040. Complete Part III of Schedule D to find your capital loss carryover or capital gains tax due.