How to Calculate & Report Your Capital Gains & Losses

Only long-term capital gains are taxed at a lower rate.

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Income from selling capital assets, like stocks, mutual funds or property, must be included on your taxes like income from working. However, instead of paying taxes on the entirety of the sales price, you must calculate your capital gains. In addition, it takes more time and tax forms to report your capital gains and losses when it comes time to file your return.

Figuring Basis

Before you can determine your capital gain or loss, you need to know your basis for whatever you sold. Generally, basis refers to what you paid to acquire the item. For example, if you paid a $12 commission and $3,000 to buy a stock, your basis is $3,012. If you did $2,000 of plumbing work in exchange for a painting, your basis for the painting is $2,000. When you inherit something from a decedent, your basis becomes the fair market value on the date the person died, regardless of what the decedent paid for it.

Trade Gains and Losses

To calculate your capital gains or losses on a particular trade, subtract your basis from your net proceeds. The net proceeds equal the amount you received after paying any expenses of the sale. For example, if you sell stock for $3,624, but you paid a $12 commission, your net proceeds are $3,612. If your basis for the stock is $3,012, subtract $3,012 from $3,612 to find you have a capital gain of $600. If your basis was $4,012, you'd have a $400 loss.

Classifying Gains and Losses

Short-term capital gains and losses come from selling assets you've owned for a year or less. But, if you owned it for at least a year, it counts as a long-term gain or loss. The distinction comes into play in two ways. First, long-term gains are taxed at lower rates than short-term gains. Second, when you're cancelling out gains and losses because you must cancel gains and losses in the same category first, and only if you have excess losses from one category can you use them against the other. For example, if you have $5,000 in short-term gains, $4,000 in long-term gains, and $3,000 in long-term losses, you must cancel out $3,000 in long-term gains. However, only investment property losses are deductible. If you sell your motorcycle or a painting that you've had hanging in your home at a loss, that's not deductible.

Tax Reporting

To report your capital gains and losses, complete Form 8949 to show each transaction and how you figured your gains and losses. For example, if you have five different sales during the year, you need to show all five on your Form 8949. Then, copy your net long-term gain or loss to Part II of Schedule D and your net short-term gain or loss to Part I of Schedule D. Use Schedule D to figure your net gains or losses, and copy the result to your Form 1040 tax return.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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