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.
Understanding Capital 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, 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.
Determining the 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 someone who passes away, your basis generally is the fair market value on the date the person died, regardless of what the decedent paid for it.
How to Calculate Gains or Losses
When you sell stocks or shares in mutual funds, you must pay taxes on any capital gains. You can use an online mutual fund capital gains calculator to figure your gains, but you can also compute them yourself fairly simply.
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.
If you want to compute your percentage loss or gain, divide the loss or gain amount by the basis and multiply by 100. That number is your gain percentage if you made money or loss percentage if you lost money.
Reporting Capital Gains
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 of Form 1040 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.
Non-Deductible Assets and Limitations
If you're using capital losses to offset capital gains, remember that 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. You can also deduct capital losses from your ordinary income, though you're only allowed to deduct up to $3,000 per year this way.
2019 Tax Law Effects
As of 2019, there are three tax brackets for long term capital gains tax rates, taxing gains at 0, 15 percent or 20 percent depending on your total maximum taxable income, not just capital gains and your filing status.
For example, in 2019, if you're single and made up to $39,375, ($38,600 for 2018), your capital gains are untaxed. If you made between $39,376 and $434,550, ($38,601 and $425,800 for 2018), your gains are taxed at 15 percent. If you made more than that, they're taxed at 20 percent.
Short term capital gains, taxed as ordinary income, currently benefit from being taxed at lower brackets than previous years due to recent tax law changes that reduces federal income tax brackets for tax years 2018 through 2025.
- Internal Revenue Service: Publication 550 – Investment Income and Expenses
- Internal Revenue Service: Topic 409 – Capital Gains and Losses
- Internal Revenue Service: Schedule D Instructions
- Internal Revenue Service: Form 8949, Sales and Other Dispositions of Capital Assets
- The Motley Fool: Your Guide to Capital Gains Taxes in 2018
- The Motley Fool: Long-Term Capital Gains Tax Rates in 2019
- Internal Revenue Service: Tax Reform
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."