How to Report Capital Gains on Your Tax Return

Selling an investment for a profit results in a capital gain, which the IRS requires you to report. Failing to do so can lead to penalties or audits, making accurate documentation essential.

Determining the type of asset sold, how long it was held, and the necessary forms for reporting ensures compliance and prevents errors that could trigger IRS scrutiny or unnecessary tax burdens.

Short-Term vs Long-Term Gains

The length of time an asset is held before being sold determines its tax treatment. If sold within a year of purchase, any profit is classified as a short-term capital gain and taxed as ordinary income, with rates in 2024 ranging from 10% to 37%, depending on total taxable income. This often results in a higher tax burden for those in higher brackets.

Holding an asset for more than a year qualifies the profit as a long-term capital gain, which benefits from lower tax rates—0%, 15%, or 20% in 2024, depending on taxable income. A single filer with taxable income up to $47,025 pays no tax on long-term capital gains, while those earning between $47,026 and $518,900 are taxed at 15%. Individuals earning more than $518,900 face a 20% rate.

High earners may also be subject to the 3.8% Net Investment Income Tax (NIIT) if their modified adjusted gross income exceeds $200,000 ($250,000 for married couples filing jointly). This makes tax planning strategies like tax-loss harvesting or holding investments longer more beneficial.

Reporting Gains from Various Assets

Different investments are subject to capital gains tax, but reporting requirements vary. The IRS requires details on sales, cost basis, and holding periods to determine tax liability. Understanding how to report gains from stocks, real estate, and digital assets ensures compliance and helps avoid penalties.

Stocks and Bonds

Capital gains from stocks or bonds are calculated by subtracting the purchase price (cost basis) from the sale price. If dividends were reinvested, those amounts should be included in the cost basis to avoid overpaying taxes. Brokerages issue Form 1099-B, detailing sales proceeds and whether the gain is short-term or long-term.

If the brokerage reports the cost basis to the IRS, taxpayers can transfer the information to Schedule D and Form 8949. If the cost basis is missing, it must be manually determined using trade confirmations or brokerage statements. Wash sale rules prevent claiming a loss if the same or a substantially identical security is repurchased within 30 days before or after the sale.

Real Estate

Capital gains from real estate depend on whether the property was a primary residence, rental, or investment property. Homeowners can exclude up to $250,000 ($500,000 for married couples) of gain on the sale of a primary residence if they lived in the home for at least two of the last five years, as outlined in IRS Publication 523.

For rental or investment properties, the entire gain is taxable, and depreciation recapture applies. Depreciation deductions reduce the cost basis, increasing the taxable gain. Recaptured depreciation is taxed at a maximum rate of 25%, separate from standard capital gains rates. A 1031 like-kind exchange allows tax deferral if a replacement property is identified within 45 days and the exchange is completed within 180 days.

Digital Assets

Cryptocurrency and other digital assets are treated as property for tax purposes, meaning each sale, trade, or exchange is a taxable event. Gains are calculated by subtracting the cost basis from the sale price, and transactions must be reported on Form 8949. If digital assets were received as payment for goods or services, the fair market value at the time of receipt becomes the cost basis.

Exchanging one cryptocurrency for another, such as trading Bitcoin for Ethereum, is taxable, even if no cash is received. The IRS has increased enforcement in this area, requiring platforms like Coinbase and Binance to issue Form 1099-DA starting in 2025. Failure to report gains can result in penalties and interest. Taxpayers should maintain detailed records of transactions, including timestamps, purchase prices, and fees, to ensure accurate reporting.

Relevant Tax Schedules

Reporting capital gains accurately requires the correct tax schedules. The primary form used is Schedule D (Form 1040), which summarizes total capital gains and losses. Most transactions must first be detailed on Form 8949, which breaks down individual sales, including acquisition date, sale date, proceeds, and cost basis.

Form 8949 is divided into two sections: one for transactions where the cost basis was reported to the IRS and another for those where it was not. Errors in cost basis reporting can lead to discrepancies that trigger IRS scrutiny. Taxpayers may need to adjust reported amounts if brokerages incorrectly classify transactions.

Additional forms may be required for complex capital gains. If an asset was inherited, the cost basis is typically the fair market value on the date of the original owner’s death, often resulting in a “step-up” in basis that reduces taxable gains. If gains come from installment sales—where payments are received over multiple years—Form 6252 must be filed to report income as it is received rather than all at once.

Offsets with Capital Losses

Capital losses can offset gains, reducing taxable income. The IRS allows investors to net capital gains against capital losses, applying losses first to gains of the same type—short-term losses offset short-term gains, and long-term losses offset long-term gains. If total losses exceed total gains, up to $3,000 of excess losses can be deducted against ordinary income annually ($1,500 if married filing separately), with any remaining losses carried forward indefinitely.

Proper documentation is required, as the IRS mandates detailed reporting of losses. Losses must be recorded on Form 8949 and transferred to Schedule D, where net gains or losses are calculated. The wash sale rule disallows a loss deduction if a substantially identical security is repurchased within 30 days before or after the sale. If triggered, the loss is added to the cost basis of the new purchase, deferring the tax benefit.

Filing Amendments for Corrections

Mistakes in reporting capital gains can lead to miscalculations in tax liability, potentially resulting in penalties or missed deductions. If an error is discovered after filing, corrections can be made using Form 1040-X, the Amended U.S. Individual Income Tax Return. This form must be used if gains were underreported, losses were miscalculated, or deductions such as capital loss carryforwards were overlooked. Most amended returns must be mailed, though the IRS provides an online tracking tool.

Corrections should be made as soon as an error is identified, as underpayment of taxes can lead to interest charges that accrue daily. If additional tax is owed, payment should be included with the amended return to avoid further penalties. If the correction results in a refund, the IRS generally allows three years from the original filing deadline to claim it. Taxpayers should retain all supporting documents, including brokerage statements and transaction records, to substantiate changes in case of an audit.