How to Pay Income Tax on Selling a Used Car

Profit on the sale of a car is subject to capital gains tax.

The Internal Revenue Service considers your automobile a capital asset. If you sell the car for less than you originally paid for it, you have a capital loss and do not have to report the loss on your personal tax filing. If you make a profit from selling the car, you must report the gain on the sale of the car and pay federal taxes on the sale. Reporting the sale of a capital asset is a two-step process that includes calculating the gain and recording the gain on the appropriate tax form.

Things You'll Need

• Original sales contract for car
• Invoices for improvements to car
• Schedule D
• Form 1040

Instructions

Calculating the Gain

1. Obtain your total purchase price for the car from your automobile sales contract. You need this amount to calculate your basis in the automobile.

2. Subtract sales tax and vehicle tax from the total purchase price, as those items are not included in your basis in the property.

3. Add the cost of any improvements made to the automobile to the adjusted basis calculated in to determine your basis in the automobile. Improvements include items such as a DVD player and engine modifications and do not the costs of regular maintenance and repair.

4. Subtract your basis in the automobile from the price for which you sold the car to calculate your gain on the sale. For example, if your basis in the car is $10,000 and you sold the car for $12,000, your gain on the sale is $2,000.

Reporting the Sale

1. Enter the year, make and model of the car in Part I of Schedule D if you owned the car less than one year. Enter the information in Part II of Schedule D if you owned the car more than one year.

2. Enter the purchase date of the car, sales date, sales price, your basis in the car and your gain on the sale on the same line of Schedule D with the car description.

3. Include your gain on the car in the total with any other capital gains reported on Schedule D and complete Part III on the back of Schedule D.

4. Transfer the final calculation amounts from Part III of Schedule D to your Form 1040 for inclusion in your federal tax liability calculation.

Tips & Warnings

• If you are not sure how to report capital gains on your federal tax filing, hire a qualified tax preparer to assist you.

References

• IRS.gov: Reporting Capital Gains
• IRS.gov: Schedule D