What is a capital asset?

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Examples include a home, personal use items like household furnishings, stocks or bonds, collectibles held as investments.

How are capital gains and losses calculated?

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

How are capital gains taxed?

Capital gains are taxed at different rates, depending on several factors:

• How long you hold the asset

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 that one year, your capital gain/loss is long-term. If you hold it for one year or less, your capital gain/loss is short-term. To determine how long you held the asset, count from the date after the day you acquired the asset up to and including the day you disposed of the asset.

Short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed at various rates depending on your federal income tax bracket.

• The type of asset you have

The amount of tax you pay on a capital gain depends on the kind of asset you have.

Type of long-term asset	Maximum capital gains tax rate
Stocks, bonds, mutual funds	0%, 15%, 20%
Depreciation recapture for real estate property	25%
Collectibles and 1202 stocks	28%

• Your income from other sources

You may qualify for preferential capital gains tax rates if your overall income is relatively low. For example, taxpayers in the 10% or 15% federal income tax brackets would pay 0% on long-term capital gains income. Taxpayers in the 20%-35% tax brackets would pay 15% on long-term capital gains. Taxpayers in the 39.6% tax bracket would pay 20% on long-term capital gains since 2013.

How can you lower your tax from capital gains

• Qualified dividends are treated as long term capital gain. To be classified as a qualified dividend, you must have held that share of stock unhedged for at least 61 days out of the 121–day period that began 60 days before the ex–dividend date. For certain preferred stock, the relevant holding period is at least 91 days out of the 181–day period beginning 90 days before the ex–dividend date.
• Loss offset gain If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent that your net long term gain is more than your net short-term capital loss, if any.
• Loss Deduction If your capital losses are more than your capital gains, you can claim a capital loss deduction. Your allowable deduction is $3,000 ($1,500 if you are married and filing separately). You can use your total net loss to reduce your ordinary taxable income up to the $3,000 limit.
• Capital loss carryover If you have a total net loss that is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you had incurred it in the subsequent years. When you carry over a loss, it remains long term or short term (use this first). A long-term capital loss you carry over to the next tax year will reduce that year’s long-term capital gains before it reduces that year’s short-term capital gains

Avoid capital gain pitfalls

• Beware the Wash Sale rule. You (or your spouse) cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stocks or securities at a loss and within 30 days before or after the sale you:
  • Buy substantially identical stock or securities;
  • Acquire substantially identical stocks and securities;
  • Acquire a contract or option to buy substantially identical stock or securities.
• Gain or loss from the sale or trade of an option to buy or sell a capital asset may trigger the short sales rule, straddle rule and constructive sales rule, which will disallow, defer or accelerate recognition of capital gains or losses.

Play with the number

The capital gains tax codes can be extremely complex, crunching the numbers may make you dizzy. Use our Capital-Gains Tax Calculator to compute your gains and losses and figure out your tax burden.