The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.
Here are 10 facts from the IRS on capital gains and losses:
- Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, stocks, bonds, and now even digital currency that you hold as investments.
- A capital gain or loss is the difference between your basis in an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.
- You must include all capital gains in your income.
- You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.
- Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
- If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a ‘net capital gain.’
- The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate in 2019 is 20%. For lower-income individuals, the rate may be 0 % or 15 % on some or all of their net capital gains. Rates of 25% or 28% can also apply to special types of net capital gains.
- If your capital losses are greater than your capital gains, you can deduct the difference between the two on your individual tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately. Also, up to $250,000 ($500,000 married) of the gain on a sale of your home can be deducted if certain requirements are met.
- If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.
- You may be subject to an additional 3.8% Net Investment Income Tax Individuals will owe this tax if they have Net Investment Income and modified adjusted gross income over $200,000 ($250,000 married). In general investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer, net of related investment expenses.
Frequently, the most difficult thing you need to determine is the basis in the asset. This is particularly difficult with items that you received as a gift or were purchased several years in the past. That is why it is critical to keep the paperwork associated with purchases until the item is sold.
If you need assistance, contact your Henry+Horne tax professional for more details.