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Almost everything you own and use for personal or investment purposes is a capital asset.
Examples include a
- home,
- personal-use items like household furnishings, and
- stocks or bonds held as investments.
When you sell a capital asset, the difference between the basis in the asset and the amount you sell it for is a capital gain or a capital loss.
Capital Gains Summary
Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. Learn More — IRS Publication 544, Sales and Other Dispositions of Assets.
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 ($1,500 if you are married filing separately).
Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. This year, the capital loss carryover worksheet has been removed from the Instructions for Schedule D to simplify tax preparation. However, there will be a worksheet in the 2004 Instructions to Schedule D to figure a capital loss carryover to 2004. See
If you have a taxable capital gain, you may be required to make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax, for information on estimated tax.
The top tax rate on net capital gain (i.e., net long-term capital gain reduced by any net short-term capital loss) has been reduced from 20% to 15% (and from 10% to 5% for gains that would otherwise be taxed at a regular rate of 10% or 15%) for property sold or otherwise disposed of after May 5, 2003 (and installment sale payments received after that date). The reduced rate applies for both the regular tax and the alternative minimum tax. The higher rates that apply to unrecaptured section 1250 gain, collectibles gain, and section 1202 gain have not changed.
Dividends paid by most domestic and foreign corporations after December 31, 2002, are eligible for the new maximum capital gains tax rate of 15% (5% in some cases). Qualified dividends are reported on line 9b of Forms 1040 or 1040A.
Additional information on capital gains and losses is available in Publications 550, Investment Income and Expenses, and 17, Your Federal Income Tax. You may download the publications from this Web site or order your free copies by calling 1-800-TAX-FORM (1-800-829-3676).
If you have investment or other types of financial losses Source IRS Tax Tip 2004-34, Feb. 19, 2004 should also check out these other IRS publications:
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Capital Gains and Losses
When you sell a capital asset, the sale normally results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment.
Capital Assets.
Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.
Gains and Losses.
A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
Net Investment Income Tax.
You must include all capital gains in your income and you may be subject to the Net Investment Income Tax if your income is above certain amounts. The rate of this tax is 3.8 percent. For details, visit IRS.gov.
Deductible Losses.
You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
Limit on Losses.
If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
Carryover Losses.
If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return. See FAQ
Long and Short Term.
Capital gains and losses are treated as either long-term or short-term, depending on how long you held the property. If you held it for one year or less, the gain or loss is short-term.
Net Capital Gain.
If your long-term gains are more than 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.
Tax Rate.
The tax rate on a net capital gain usually depends on your income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain.
Forms to File.
- You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses.
- Schedule D, Capital Gains and Losses
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