Tax Facts About Capital Gains and Losses

By Mike Wallace,2014-04-05 22:06
11 views 0
Tax Facts About Capital Gains and Losses

    IRC ?1221 and ?1222

    Taken from ---,,id=106799,00.html

    Tax Facts About Capital Gains and Losses

     IRS TAX TIP 2007-34

    Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset, the difference between the amounts you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only capital losses on investment property, not personal property.

    Here are a few tax facts about capital gains and losses:

    ; Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to

    line 13 of Form 1040.

    ; 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.

    ; Net capital gain is the amount by which your net long-term capital gain is more than your net short-term

    capital loss.

    ; The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other

    income and are called the maximum capital gains rates. For 2006, the maximum capital gains rates are

    5%, 15%, 25% or 28%.

    ; 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).

Take from ---

    Netting Out Capital Gains and Losses on Schedule D

    By Peter Thelander

    This article was written by guest writer and long-time Tax Strategies Discussion Board participant Peter Thelander. Many Foolish thanks to Peter for his wonderful contribution! We hope you enjoy it.

    Most of us are aware that you have to net out your capital gains and losses when figuring your taxes for the year. But how does all this netting work? Should I be hanging around the local dock to learn how to net my capital gains and losses? Let's try to unravel some of this mystery.

    First, there are a couple of levels of netting. Long-term items are netted separately from short-term items. Then, the long and short are netted together to produce the final result. It's easiest to just look at an example.


    Example: Long John Silver sold two stocks so far this year. Both were held for more than a year, so they are long-term items. Long John had a gain of $1,000 on his investment in -- an Internet startup selling trout and salmon online to unlucky fisherman -- but a $600 loss on Fish-R-Us -- a retailer of fish-shaped toys

    for kids. Subtract the loss from the gain and we find that he has a net $400 long-term gain.

    Now, let's say that he sells two more stocks before year-end. His investment in Mackerel Industries has turned out to be a real stinker. So he unloads it for a $300 short-term loss. And Minnow, Inc. turned a small short-term gain of $50. Net these two items together, and Long John has a $250 short-term loss.

    Finally, we net the short-term items with the long-term items and find that Long John has a net $150 long-term gain.

    If you roll this around in the gray matter for a while, you'll find that everything will boil down to one of four situations:

     long-term gain with short-term gain

     long-term loss with short-term gain

     long-term gain with short-term loss

     long-term loss with short-term loss

    Let's look at each of these situations.

    Long-Term Gain With Short-Term Gain

    Ahhh -- investment nirvana! Everything nets out to a winner. Your taxes here are pretty simple. (Don't worry, though, they'll get more challenging as we go along.) The long-term gain gets the preferential rate of 10% or 20%, depending on your tax bracket. The short-term gain is taxed with your other income at your marginal rate. Long-Term Loss With Short-Term Gain

    We have to look at two situations here. If the gain is bigger than the loss, you have a net short-term gain -- taxed at your marginal rate. If the loss is bigger, you have a net long-term loss. Up to $3,000 can be used to offset other kinds of income. Any unused amount will carry forward to the following year as a long-term loss. Long-Term Gain With Short-Term Loss

    Again we have to consider two scenarios. If the gain is bigger than the loss, you have a net long-term gain and get to take advantage of the favorable rates for the net gain. If the loss is larger, it is a net short-term loss and, just like the previous situation, you use up to $3,000 of the loss against other types of income, with any balance carrying forward to the next year as a short-term loss.

    Long-Term Loss With Short-Term Loss

    Have you ever considered index funds? This one looks simple, but there is a twist. By now, you know that a maximum of $3,000 in losses will offset ordinary income. So, if the total of the two losses is less than $3,000, you're done. But what if the total loss is more than $3,000 and some must be carried over to next year? Is the carryover short-term or long-term? Well, it can be just long-term or a combination of long- and short-term. But it will never be just short-term. Why? Because you must use the short-term losses first. If your short-term losses

    are more than $3,000, you use the first $3000 to offset ordinary income, then carry the remaining short-term loss along with all of the long-term loss over to next year. If the short-term loss is less than $3,000, you can just total the two losses together, take the $3,000 off, and the balance is a long-term loss carryover to the following year.


    So, the process for determining the long-term or short-term character of your capital gains and losses can be summarized in three steps:

    1. Net your long-term items together

    2. Net your short-term items together

    3. Determine which of the above four situations applies to you and follow the instructions there.


Report this document

For any questions or suggestions please email