Anything you own, whether it’s something you use for personal reasons or an investment purpose, is considered a capital asset. Things like your home, furniture, and vehicle, as well as stocks and bonds are all examples of the types of capital assets many people own.
If you chose to sell one of these assets, the result will either be a capital gain or a capital loss, depending on the base cost of the asset and what you sold it for. Selling for a greater amount than you paid for the asset will result in a capital gain, while a capital loss occurs when the sale price is lower. Any loss from the sale of personal use property (a home or vehicle) isn’t eligible for deduction at tax time.
Capital losses and gains are considered either long-term or short-term depending on how long you held the asset in your possession. Anything less than a year is typically a short-term capital loss, while longer times are long-term. The day you acquired the asset from the day you sold it or got rid of it is the period of possession.
You have to report any transactions on capital assets at tax time using Form 8949, Sales and Other Dispositions of Capital Assets. Any capital gains or deductions of losses can be done on a Schedule D or Form 1040. Generally, the taxation rate is 15% or less for net capital gains, determined by your tax bracket. Some net gains are taxed at 20% depending on the income threshold of the asset holder in relation to an ordinary tax rate of 39.6%.
Other rates of taxation of capital gains apply when:
- The gain is from the sale of a section 1202 qualified small business stock. These will be taxed at a maximum rate of 28%.
- Collectible items, such as art or coins, are sold for a net gain. The taxation rate is 28%.
- An uncaptured section 1250 gain results from the sale of a 250 real estate property. The tax is applied at 25% max.
Income graduation rates apply to short-term capital gains, which may require you to make estimated tax payments throughout the year.
During the year, if you’ve encountered more capital loss than gain, you can claim the lesser amount of two options:
- $3,000 ($1,500 if filing married, separately)
- your total net loss as reported on line 16 of Form 1040
You can carry forward any additional amounts of your total net loss exceeding $3,000 to the next tax year.