Investment / Capital Gains Tax

Overview

Capital assets are classified as property owned by a taxpayer for personal or investment purposes. Capital assets include real estate, works of art, jewelry, household furnishings and securities.

What is a capital gain?

A capital gain is the profit realized from the sale of a capital asset. Capital gains occur any time a taxpayer sells an asset that has appreciated in value. A capital gain is measured by the difference between the sale price and the taxpayer's basis in the asset. The basis is typically defined as the amount the taxpayer initially paid for the asset, adjusted for depreciation, the cost of improvements and various other considerations. If the asset was a gift, the basis is measured by the amount the gift-giver paid for the asset.

What is a capital loss?

A capital loss is any loss realized from the sale of a capital asset. A capital loss is incurred when a capital asset depreciates in value and is sold for less than the taxpayer paid for the asset.

What is the difference between a short-term and long-term capital gain?

A "short-term" capital gain is the gain realized from the sale of property held by a taxpayer for less than one year. If the taxpayer has owned an asset for over a year at the time of sale, the gain from the transaction is classified as a "long-term" capital gain. Long-term and short-term capital gains are taxed at different rates by the Internal Revenue Service.

What is a capital gains tax?

A capital gains tax is a federal tax imposed on capital gains. Capital gains are reported on an individual's income tax return. Short-term capital gains are taxed at a rate equal to the taxpayer's income tax rate. Long-term capital gains, however, are taxed at a lower rate. Long term capital gains are taxed at a rate of 15% through 2010.

What happens if I report both capital losses and capital gains?

If a taxpayer realizes both capital gains and capital losses in the same year, a taxpayer's capital gains may be offset by any capital losses. If a taxpayer's capital gains exceed capital losses, the taxpayer is left with a net capital gain that will be subject to capital gains tax. If a taxpayer's capital losses exceed capital gains, the taxpayer may be able to claim a tax deduction of up to $1,500 ($3,000 for married taxpayers filing a joint return). If a taxpayer experiences a net capital loss that exceeds this amount, the loss may be carried forward and the taxpayer may claim a deduction in later years.

Can all capital losses be deducted?

No. Losses for personal-use capital assets, such as a personal automobile, cannot be deducted as a capital loss.

Am I subject to capital gains taxes when I sell my home?

Yes. A gain realized from the sale of a home is subject to capital gains tax because real estate is considered a capital asset. However, a taxpayer may be able to exclude a portion of any capital gain realized from the sale of a primary residence. A primary residence is a home lived in by the taxpayer for at least two of the five years before the date of sale. An individual may exclude up to $250,000 of capital gain on the sale of this property, while a married couple filing jointly may exclude up to $500,000 of capital gain.