Tax Impacts on Capital Gains or Losses
You generate a capital gain or loss every time you sell a capital asset. Capital assets include all personal-use and investment properties you own, but specifically exclude rental homes and assets you use in a business. There is a tax impact to each gain and loss you report to the Internal Revenue Service; however, there are other factors that affect what the precise tax implications are.
Other People Are Reading
-
Gain or Loss
-
Calculating the gain or loss from each sale of a capital asset is straightforward. However, you must first ascertain what the tax basis is for each capital asset, which is generally the price you pay to acquire the property plus the cost of improvements you make to it before the sale. You can then calculate your gain or loss as the difference between the tax basis and the sale price of each asset. A gain results when you sell the asset for more than its tax basis and a loss results when you sell it for less.
Assessing Holding Period
-
An important factor for evaluating the tax impact of a capital asset transaction is your holding period. This determines whether you should classify the gain or loss as short-term or long-term. If you own the asset for one year or less, you treat it as a short-term gain or loss. But if you own it for more than one year, classify it as long-term. The IRS treats all of your capital losses the same, regardless of the holding period. However, your short-term gains are subject to the same ordinary income tax rates you pay on all other gross income you report on your Form 1040. In contrast, your long-term gains are subject to capital gains tax rates that are lower than the ordinary income tax rates.
-
Netting Transactions
-
When you prepare your Schedule D to report all capital asset transactions, you must separate all long-term transactions from the short-term ones. You then combine all gains and losses for each holding period to arrive at an overall short-term gain or loss and long-term gain or loss. In essence, this allows you to reduce your taxable gains by all losses. If both results are gains, different tax rates will apply to each category. But if one results in a gain and the other in a loss, you combine the two figures together to arrive at your total capital gain or loss for the year.
Remaining Losses
-
If your losses exceed gains in a year, you can always carry the loss forward to reduce any capital gains you report in future tax years. However, any excess loss that remains at the end of the year is eligible for a $3,000 deduction from your ordinary income if it relates to the sale of investment property. Your investment capital assets include all property you purchase with the intention of generating income, such as the stocks and bonds you sell at a loss. However, this never includes your personal-use property, such as your homes, cars and boats, to name just a few.
-
