Most property you own and use for personal or investment purposes is considered a capital asset. When you sell that capital asset the sale usually results in a capital gain or a capital loss. Here are 10 facts to help you more fully understand capital gains and losses.
- Capital assets include property such as your home or car and may also include any investment property such as stocks and bonds.
- A capital gain or loss is the difference between your basis and the amount in which you sell an asset. Your basis is usually (but not always) what you paid for the asset.
- All capital gains should be included in your income. Beginning in 2013 you may be subject to the Net Investment Income Tax. The NIIT applies at a rate of 3.8% to certain net investment income of individuals estates and trusts that have income above statutory threshold amounts of $200000 for single filers and $250000 for joint filers.
- Capital losses can be deducted on the sale of investment property. You can’t deduct losses on the sale of personal-use property.
- Capital gains can be either long-term or short-term depending on how long you held the property. If you held the property for more than one year your gain or loss is long-term. If you held it one year or less the gain or loss is short-term.
- If your long-term gains are more than your long-term losses the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss you have a net capital gain.
- The tax rates that apply to net capital gains usually depend on your income. Although the maximum net capital gain tax rate rose from 15 to 20 percent in 2013 a 0 or 15 percent rate continues to apply to most taxpayers in lower tax brackets. A 25 or 28% tax rate can also apply to special types of net capital gains.
- If your total capital losses are more than your total capital gains you can deduct the difference as a loss on your tax return. This loss is limited to $3000 per year or $1500 if you are married and file a separate return.
- You can carry over the losses you are not able to deduct onto next year’s tax return if your total net capital loss is more than the deductible limit. Treat those losses as if they happened that year.
- You must file Form 8949 Sales and Discussion Other Dispositions of Capital Assets and Schedule D Capital Gains and Losses along with your federal tax return to report your gains and losses.
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