What Are Taxable Capital Gains and Losses?

When you sell an investment like stocks or property, the transaction has tax consequences. The profit or loss from this sale is a capital gain or loss. The Internal Revenue Service (IRS) rules determine how these are taxed, covering how to define, calculate, and report them on your tax return.

Defining Capital Assets and Basis

A capital asset is most property you own for personal use or as an investment, including stocks, bonds, and mutual funds. It also covers personal property like your home or car, though losses on the sale of personal-use property are not tax deductible. Some property is excluded from being a capital asset, such as business inventory, accounts receivable, and certain copyrights held by their creator.

To determine a gain or loss, you must know the asset’s basis, which is your investment in the property for tax purposes. This is the original cost you paid for the asset, including purchase-related expenses like sales tax or commissions. For example, if you buy 100 shares of stock for $10 per share and pay a $10 commission, your basis is $1,010.

Over time, your original basis can change, resulting in an “adjusted basis.” You increase your basis for costs of capital improvements, like adding a new room to a house. Conversely, you decrease your basis for items like depreciation deductions or insurance reimbursements for casualty losses. If you bought a rental property for $200,000 and spent $25,000 on a new roof, your adjusted basis would be $225,000.

Calculating Capital Gains and Losses

A capital gain or loss is the difference between the amount you realized from the sale and your adjusted basis. You have a capital gain if you sell an asset for more than its adjusted basis and a capital loss if you sell for less. The amount realized is the sale price minus any expenses of the sale, such as brokerage fees.

The holding period, or the length of time you own an asset, determines if the gain or loss is short-term or long-term. To be considered long-term, you must hold the asset for more than one year. If you hold it for one year or less, the gain or loss is short-term, which is important because the two are taxed differently.

The holding period is counted from the day after you acquired the asset up to and including the day you sold it. For example, purchasing a stock on June 1, 2023, and selling it on May 15, 2024, results in a short-term transaction. If you sold it on June 5, 2024, it would be a long-term transaction.

Tax Treatment of Capital Gains

Short-term capital gains do not receive preferential tax treatment and are taxed at your ordinary income tax rates. These are the same rates that apply to your wages and other earned income. For 2024, these rates range from 10% to 37%, depending on your total taxable income and filing status.

Long-term capital gains are taxed at lower rates of 0%, 15%, or 20%. The specific rate you pay is determined by your taxable income for the year.

For the 2024 tax year, the 0% rate for long-term capital gains applies to individuals with taxable income up to $47,025 for single filers and $94,050 for those married filing jointly. The 15% rate applies to income above those thresholds up to $518,900 for single filers and $583,750 for married couples filing jointly. The 20% rate applies to taxpayers with income exceeding those upper limits. These income thresholds are for your total taxable income, not just the gain itself.

Tax Treatment of Capital Losses

If your capital losses exceed your capital gains, you have a net capital loss that can reduce your taxable income. The process begins by netting your gains and losses. Short-term losses are first used to offset short-term gains, and long-term losses are used to offset long-term gains.

If you have a net loss in one category, you can use it to offset a net gain in the other. For instance, a net short-term loss of $5,000 can offset a net long-term gain of $4,000. This leaves a remaining net short-term loss of $1,000.

If you still have a net capital loss after the netting process, you can deduct it against other income, such as your salary. You can deduct the lesser of $3,000 per year ($1,500 if married filing separately) or your total net loss for the year.

If your net capital loss is greater than the annual deduction limit, the unused portion can be carried forward to future tax years indefinitely. This capital loss carryover retains its character as short-term or long-term. It can be used to offset capital gains or be deducted against ordinary income in subsequent years.

Reporting on Your Tax Return

You will report capital gains and losses to the IRS using Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses. You must complete Form 8949 first, as the totals are needed to complete Schedule D.

On Form 8949, you list the details of each capital asset sale, including a description of the property, acquisition and sale dates, sales price, and basis. The form is divided into parts for short-term and long-term transactions. You must also indicate if the basis was reported to the IRS on Form 1099-B from your broker.

The totals from Form 8949 are transferred to Schedule D, which summarizes all gains and losses from various sources, like partnerships. On Schedule D, you perform the final netting of your gains and losses. This calculates your net capital gain or loss for the year, which is then reported on your Form 1040.