It is important to understand capital gains and losses when filling out your federal income tax return. The category of capital asset includes almost everything you have which you use for personal and investment reasons. Your home, household furnishings, stocks, and bonds in personal accounts are considered capital assets. Your capital gains and losses are calculated from the difference between the amount you paid originally for that asset and the amount you received when you sold it.
The IRS publishes important information to help you understand how your investments affect your tax return.
When you are figuring out what is classified as a capital asset, remember that purchases you made for personal, investment, and pleasure purposes are all included. Upon your resale of that asset, you can calculate your capital gain or loss. The original purchase amount is generally your basis from which you will derive your loss or gain.
Make sure to report all of your investment income on your tax return on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. Keep in mind that you can only deduct capital losses that come from investment property, not from personal property. They are classified in accordance with how long you actually owned it. They are either short-term or long-term, and that classification is based on one year’s time. If you held it for one year or less, it is considered short-term. If you held it any longer than one year, it is long-term.
To have net capital gain, your long-term gains must be greater than your long-term losses. The difference between your loss and you gain in this case equals your net capital gain. Net capital gain is calculated separately from your regular income because the tax rates are lower, typically 15 percent. For individuals with lower incomes, the tax rate may be as low as 0%, but some specific types of net capital gains are taxed at 25% or 28%.
On the flip side, if you lose more than you gain, you can deduct those losses on your income tax return. This could reduce up to $3,000 in taxable wages (or $1,500 if you are married filing separately). If your net capital loss is greater than this amount, then you can treat it on your next year’s tax return as if it happened in that year.
More details on reporting these parts of your income are available on the Schedule D instructions, Publication 550, Investment Income and Expenses or on Publication 17, Your Federal Income Tax.