Almost everything you own and use for personal purposes, or investment is a capital asset. Examples are your home, household furnishings, and stocks or bonds held in your personal account. When you sell a capital asset, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. If you did not buy the asset yourself, refer to Topic 704 for information about basis. You have a capital gain if you sell your asset for more than your basis.

You have a capital loss if you sell your asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. Generally, you have a long-term gain or loss if you hold the property more than one year, and a short-term gain or loss if you hold the property for one year or less.

You must report capital gains and losses on Schedule D of Form 1040. You pay tax on capital gains just as you pay tax on other types of income;

however, because the highest income tax rate on net long-term capital gain income is 28%, you may need to use the Capital Gain Tax Worksheet in the Form 1040 instructions. If you have a capital gain on the sale of your main home, special rules apply. Refer to Topics 701, 702, and 703, or see Publication 523, Selling Your Home, for specific information related to home sales.

If you have a capital gain, you may be required to make estimated tax payments. Refer to Topic 355 or see Publication 505, Tax Withholding and Estimated Tax, for additional information on estimated tax.

If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return up to an annual limit of $3,000, or $1,500 if you are married filing separately. If your net capital loss is more than this limit, figure the amount of loss that can be carried forward to later years by using the Capital Loss Carryover Worksheet in the instructions for Schedule D.

More information on capital gains and losses is available in Publication 550, Investment Income and Expenses; and Publication 544, Sales and Other Dispositions of Assets.

Tax Topics & FAQs | Tax Help Archives | Home