The 1997 Taxpayer Relief Act made major changes in capital gains for assets sold after
May 6, 1997.
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
Capital gains and losses are classified as long-term or short-term, depending on how
long you hold the property before you sell it. The 1997 Relief Act changed the holding
periods for capital assets. For assets sold before May 7, 1997, the holding period for
long term capital assets is more than one year. For assets sold between May 7, 1997 and
July 28, 1997 and held for more than one year, these "mid-term gains" are
considered long term. After July 28, 1997, capital assets are not considered long term
unless held more than eighteen months. Assets not qualifying for long term treatment are
short term capital assets which are taxed at the ordinary income rate.
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. From January
1,1997 through May 6, 1997, the highest income tax rate on net long-term capital gain
income is 28%. Capital assets considered "collectibles" such as coins or art
remain taxable at a maximum 28% rate. After May 6, 1997, the highest long term capital
gains tax rate is 20 percent, 10 percent for those in the 15 percent tax rate. The
recaptured portion of depreciation on Section 1250 real property is taxed at a maximum 25%
For additional information on future capital gain and loss tax changes see Publication 553, Highlights of 1997 Tax Changes. If you have a
capital gain on the sale of your main home, special rules apply. Refer to Topics 701, 702, and 703, or
order Publication 523 for specific information related to home
sales. If you have a taxable capital gain, you may be required to make estimated tax
payments. Refer to Topic 355 or order Publication
505 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.
At the time this topic was written, Congress was considering legislation that may
effect the reporting of Capital Gains and Losses. For information on changes please call
1-800-829-1040. Additional information on capital gains and losses is available in Publication 550, Investment Income and Expenses; and Publication 544, Sales and Other Dispositions of Assets.
Publications can be ordered by calling 1-800-829-3676 or downloaded from this web site.
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