Tax Topic 409 - Capital Gains and Losses

What is a Capital Gain or Loss?

A capital gain or loss is the difference between your basis (or adjusted basis) in an asset and the amount you receive when you sell or exchange the asset. The basis of an asset is usually what you paid for it, plus certain adjustments.

You have a capital gain if you sell or exchange the asset for more than your basis. You have a capital loss if you sell or exchange the asset for less than your basis.

Short-Term vs. Long-Term Capital Gains

Short-Term Capital Gains

If you hold an asset for one year or less before selling or exchanging it, any gain or loss is a short-term capital gain or loss. Short-term capital gains are taxed at ordinary income tax rates.

Long-Term Capital Gains

If you hold an asset for more than one year before selling or exchanging it, any gain or loss is a long-term capital gain or loss. Long-term capital gains are taxed at preferential rates of 0%, 15%, or 20% depending on your income level.

How to Report Capital Gains and Losses

You must report capital gains and losses on your tax return. Use Form 8949 to report sales and exchanges of capital assets, and Schedule D to summarize capital gains and losses.

Form 8949

Use Form 8949 to report:

• The sale or exchange of a capital asset not reported on another form or schedule
• Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit
• Nonbusiness bad debts
• Undistributed capital gains from a trust or estate

Schedule D

Use Schedule D to:

• Report overall capital gains and losses
• Figure any adjustment to gain or loss from Form 8949
• Report certain transactions you don't have to report on Form 8949

Cost Basis

Your cost basis is generally what you paid for an asset, including:

• Purchase price
• Sales commissions and recording fees
• Legal fees
• Surveying fees
• Transfer taxes

You may be able to adjust your cost basis for certain events, such as:

• Stock splits
• Capital improvements
• Certain corporate actions

Net Capital Gains and Losses

To figure your net capital gain or loss, subtract your capital losses from your capital gains. If your net capital loss exceeds your net capital gain, you can deduct up to $3,000 ($1,500 if married filing separately) of the excess against your ordinary income.

Any remaining net capital loss can be carried forward to future years.

Additional Resources