What Is a Capital Disposal for Tax Purposes?

A capital disposal is the sale or other disposition of a capital asset. When you dispose of a capital asset, the transaction has tax consequences, resulting in either a capital gain or a capital loss. This gain or loss, which is the difference between the amount you received and your adjusted basis in the asset, must be reported on your income tax return.

Identifying a Capital Disposal

The Internal Revenue Service (IRS) defines a capital asset as almost everything you own and use for personal or investment purposes. This includes items like stocks, bonds, and mutual funds. It also covers real estate, such as your primary residence or a vacation home, and personal property like household furnishings, jewelry, and automobiles.

Certain property is excluded from the definition of a capital asset. This includes inventory held for sale to customers, depreciable property and real estate used in a business, and copyrights or literary compositions held by their creator. Accounts or notes receivable acquired in the ordinary course of business are also not capital assets.

A “disposal” of a capital asset is not limited to a simple sale for cash and encompasses a wide range of transactions. For instance, exchanging one asset for another is a disposal. Gifting a capital asset to another person or the loss of an asset due to theft or destruction are also considered disposals for tax purposes.

Calculating the Capital Gain or Loss

To calculate the capital gain or loss, you need three primary components: the proceeds of disposition, the adjusted cost basis (ACB), and any related outlays and expenses. The formula is to subtract the ACB and any expenses from the proceeds of disposition. The result is a capital gain if positive, or a capital loss if negative.

The proceeds of disposition is the amount you received for the asset. In a typical sale, this is the selling price of the property. If you gift a capital asset, the proceeds are considered to be the fair market value (FMV) at the time of the gift. The FMV is the price that the property would sell for on the open market.

Your adjusted cost basis (ACB) represents your total investment in the asset, starting with the original cost you paid to acquire it. This initial cost is increased by expenses to acquire it, such as commissions or legal fees. The ACB is also increased by the cost of capital improvements, like adding a new room to a house. The rules for determining the basis for gifted or inherited assets can be different.

Outlays and expenses are the costs you incur directly in the process of selling your asset. These are subtracted from the proceeds of disposition and include items like brokerage commissions, legal fees, and advertising costs. Keeping detailed records of these expenses is important, as they reduce your calculated capital gain.

Tax Treatment of Capital Gains and Losses

The tax treatment of a capital disposal depends on how long you held the asset. This holding period determines if the gain or loss is short-term or long-term. If you hold an asset for one year or less before disposal, the result is short-term. If you hold it for more than one year, the gain or loss is long-term.

Short-term capital gains are taxed at your ordinary income tax rates. These are the same progressive rates that apply to your wages, salary, and other income.

Long-term capital gains are taxed at rates of 0%, 15%, or 20%, depending on your taxable income. For the 2025 tax year, the long-term capital gains tax rates for a single filer are:

• 0% on taxable income up to $49,225
• 15% on taxable income from $49,226 to $547,850
• 20% on taxable income over $547,850

In addition to capital gains tax, a Net Investment Income Tax (NIIT) of 3.8% may apply. This tax is levied on capital gains and other investment income for individuals, estates, and trusts with income above certain high thresholds.

If your capital disposals result in a net capital loss, you can use it to offset capital gains. If your losses exceed your gains, you can deduct the difference on your tax return, up to $3,000 per year ($1,500 if married filing separately). If your net loss is more than this limit, you can carry the excess forward to later years. Losses from the sale of personal-use property are not tax deductible.

Reporting a Capital Disposal

You must report your calculated capital gain or loss to the IRS on your annual income tax return. The primary forms for this are Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses. These are filed with your Form 1040 and require a description of the property, the acquisition date, and the disposal date.

On Form 8949, you report the details of each capital asset disposal, including the proceeds, cost basis, and any adjustments. The form is divided into sections for short-term and long-term transactions. After completing Form 8949, you transfer the totals to Schedule D to summarize your capital gains and losses.

The net gain or loss from Schedule D is then transferred to the appropriate line on your Form 1040. A net capital gain is added to your other income, while a deductible net loss is subtracted. It is important to keep accurate records of all transactions to support your calculations.