A Refresher on Capital Gains and Losses

A Refresher on Capital Gains & Losses by Stephen J. Ganns, CPA{3:54 minutes to read}  Most taxpayers are aware of capital gains and losses, because somewhere along the way they might have sold some stocks and/or bonds. Just to clarify a little more about what capital gains/losses are, and what is reportable and not, I offer the following:

Capital Assets

Capital assets include property such as:

  • Stocks
  • Bonds
  • Securities
  • Home
  • Car
  • Investment property (i.e. rental piece of real estate)

Another type of asset that a business will have is inventory. To clarify:

  • A computer that I own in my business is a capital asset
    • When sold or traded, it results in a capital gain or loss
  • A computer at Dell Manufacturing is inventory
    • When sold, it is ordinary income

Gains vs. Losses

A capital gain or loss is the difference between your basis, which is usually your cost, and what you ended up selling or trading that asset in for (in the case of an exchange). You can deduct capital losses on investment property, but you cannot deduct losses on the sale of property that you hold for personal use.

For instance, if my wife owns a car and we sell it as a loss, I cannot deduct that loss. However, if my business owns a car and we sell at a loss, I can take a loss on that. Again, that is a non-personal capital asset that I can deduct, not a personal asset. However, I am required to report ANY gain on the sale of any capital asset whether personal or held for investment.

Short and Long Term

Many people are aware that gains and losses are either short-term or long-term. Long-term assets are those held for more than one year. Short-term gains and losses arise from the sale of capital assets that are held for one year or less. Assets held exactly one year are short-term gains or losses.

At the end of the year when you file your income tax returns, you must report the net gains and losses from the sale of capital assets

Income Tax Reporting

If you have more net long-term gains than you have short-term losses, you end up with a net long-term gain and report it as such.

If you have more capital losses than you have capital gains, you can only deduct $3,000 unless married filing separately. In that case, your limit is $1,500. However, any losses above that can be carried over to future years to offset gains or to continue to deduct at $3,000 a year. If you have a loss the following year, you add that one to the remainder from this year, and then you claim $3,000. You can continue to carry over the loss until you no longer have a loss, or you have a net gain.

The forms that you would need to use to report these kinds of transactions are Form 8949 and Schedule D. Capital gain tax rates range from 0 to 20% on most capital assets, but there is also a 3.8% investment income tax for taxpayers in higher income brackets.

As always, if you have any questions, please consult your taxman, or you can always call us at 914-682-7007.

Stephen J. Ganns

Stephen J. Ganns, CPA


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