Capital Gains and Losses - The Facts

Do you have questions about reporting gains and losses on your tax return? Here are some facts from the IRS.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

When you sell a capital asset, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss.

You must report all capital gains.

You may deduct capital losses only on investment property, not on property held for personal use.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.

The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2008, the maximum capital gains rates are 0%, 15%, 25% or 28%.

If your capital losses exceed your capital gains, the excess can be deducted on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).

If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

For more information about reporting capital gains and losses, use the following web sites:

Publication 17, Your Federal Income Tax (PDF 2015.9K)
Publication 550, Investment Income and Expenses (PDF 516K)
Publication 544, Sales and Other Dispositions of Assets (PDF 321K)
Publication 505, Tax Withholding and Estimated Tax (PDF 367K)
Publication 564, Mutual Fund Distributions (PDF 178K)
Publication 547, Casualties, Disasters, and Thefts (PDF 133K)
Publication 527, Residential Rental Property (Including Rental of Vacation Homes) (PDF 187K)

Do You Know The Basis In Your Property?

Basis is the term used for the amount of your investment in a property. For tax purposes, use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale or exchange of the property.


Basis of Property
The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, borrowed money, and other property or services. Cost includes sales tax and other expenses connected with the purchase.


Basis of Securities
If you buy securities (stocks or bonds) your basis is the purchase price plus any additional costs such as commissions and recording or transfer fees. If you have securities that you did not purchase, the method for determining your basis depends on how you acquired the securities. For example, if you inherited the securities your basis is usually their fair market value on the date the decedent died.


Adjusted Basis
Before figuring gain or loss on a sale, exchange, or other disposition of property, or figuring allowable depreciation, you must usually determine the adjusted basis of that property. Certain events that occur during your period of ownership may increase or decrease your basis. Increase your basis by items such as the cost of improvements that add to the value of the property and certain acquisition fees, and decrease it by items such as depreciation and insurance reimbursements for casualty and theft losses.

Additional resources:

Capital Gains and Losses
Interest Income
Dividends
Form 1099