How to Report Capital Gains on Your Tax Return
Learn how to accurately report capital gains on your tax return, differentiate between short- and long-term gains, and apply strategies to manage tax liability.
Selling investments like stocks, real estate, or cryptocurrency for a profit triggers capital gains taxes. The IRS requires you to report these gains, and how much you owe depends on how long you held the asset and your income level. Understanding the reporting process can help you avoid mistakes and reduce your tax bill.
Handling capital gains involves more than listing profits—calculating gains correctly, offsetting them with losses, and maintaining accurate records are all key steps.
Classification: Short-Term vs. Long-Term
The length of time you hold an asset before selling determines how the IRS taxes your profit. Selling within a year results in short-term gains, taxed at ordinary income rates, which can be as high as 37% in 2024. Holding for more than a year qualifies for lower long-term capital gains rates, capped at 20% for most taxpayers.
For example, if you bought shares in January 2023 and sold them in December 2023, the gain would be taxed as ordinary income. Waiting until February 2024 would qualify for the lower long-term rate. This distinction is especially important for high earners who would otherwise pay the top marginal tax rate.
Certain assets have unique tax rules. Collectibles like art, coins, and precious metals face a maximum 28% tax rate on long-term gains. Real estate has special considerations, such as depreciation recapture, which can result in a 25% tax rate on part of the gain.
Calculating Gains
Capital gains are determined by subtracting the cost basis from the selling price. The cost basis includes the original purchase price plus related expenses like commissions, fees, or improvements. For example, if you bought a stock for $5,000 and paid a $50 brokerage fee, your cost basis would be $5,050.
Inherited assets receive a step-up in basis, meaning their cost basis is adjusted to the fair market value at the original owner’s death. This can significantly reduce taxable gains when sold. Gifted assets generally retain the original owner’s cost basis unless the fair market value at the time of the gift is lower, in which case special rules apply.
Certain investment strategies complicate cost basis calculations. Dividend reinvestment plans (DRIPs) use dividends to buy additional shares, each with its own cost basis. Stock splits increase the number of shares while proportionally reducing the cost basis per share. Keeping detailed records ensures accurate reporting when selling shares.
Offsetting Gains with Losses
Capital losses can reduce taxable gains, a strategy known as tax-loss harvesting. Selling an investment for less than its purchase price creates a loss that can offset gains from other investments. Short-term losses are most effective against short-term gains, which are taxed at higher rates. Long-term losses should be prioritized against long-term gains for maximum tax savings.
If total losses exceed total gains, taxpayers can deduct up to $3,000 ($1,500 for married individuals filing separately) from ordinary income, with remaining losses carried forward indefinitely. For example, a $10,000 net capital loss in 2024 allows a $3,000 deduction in 2024, with the remaining $7,000 carried forward.
The IRS wash sale rule prevents investors from claiming a loss if they repurchase the same or a substantially identical security within 30 days before or after selling it at a loss. This applies to stocks, options, mutual funds, and ETFs. To maintain exposure while avoiding a wash sale, investors can purchase a similar but not identical security, such as shares in a competitor or an ETF tracking the same sector.
Reporting Gains on Tax Filings
Capital gains are reported on Schedule D (Form 1040), which summarizes all transactions and calculates the total taxable amount. Each sale is listed on Form 8949, detailing acquisition and sale dates, proceeds, cost basis, and any applicable adjustments. Transactions are categorized based on whether brokers provided cost basis information to the IRS.
Gains from partnerships, S corporations, or trusts are reported on Schedule K-1, which details each investor’s share of gains, losses, and deductions. These figures must be transferred to Schedule D. Discrepancies between entity-reported figures and individual tax returns can trigger IRS audits.
High-income taxpayers may also owe the Net Investment Income Tax (NIIT), an additional 3.8% tax on capital gains if their modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. This surtax applies to passive income sources, including capital gains, dividends, and rental income.
Documentation Requirements
Accurate records are essential for reporting capital gains and avoiding IRS disputes. Taxpayers should retain purchase and sale confirmations, brokerage statements, and records of dividends reinvested or improvements made to real estate. These documents support cost basis calculations and ensure accurate reporting.
For inherited or gifted assets, additional documentation may be required, such as estate tax returns, appraisals, or records from the original owner. If an asset was acquired in a non-cash transaction, such as a stock-for-stock exchange or a merger, taxpayers must track the adjusted basis to determine the correct gain upon sale. The IRS generally recommends keeping these records for at least three years after filing a return, but in cases where basis documentation is unclear, retaining them indefinitely can prevent future tax complications.