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Category: Questions about Income

What is a "capital asset"?

Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, household furnishings, and stocks or bonds held in your personal account. 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. If you received the asset as a gift or inheritance, refer to Publication 551 for information about your basis. 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.

Capital gains and losses are classified as long–term or short–term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or 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.

Capital gains and deductible capital losses are reported on Form 1040, Schedule D (PDF). If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates. The term "net capital gain" means the amount by which your net long–term capital gain for the year is more than the sum of your net short–term capital loss and any long-term capital loss carried over from the previous year. Generally, net capital gain is taxed at rates no higher than 20%. However, for the years 2008 through 2013, some or all net capital gain may be taxed at 0%.

There are 3 exceptions:

  1. The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate.
  2. Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.
  3. The part of any net capital gain from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum 25% rate.

 

If you have a taxable capital gain, you may be required to make estimated tax payments. Refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is limited to $3,000, or $1,500 if you are married filing separately. If your net capital loss is more than this limit, you can carry the loss forward to later years. Use the Capital Loss Carryover Worksheet to figure the amount carried forward.

Additional information on capital gains and losses is available in Publication 550, Investment Income and Expenses, and Publication 544, Sales and Other Dispositions of Assets. If you sell your main home, refer to Publication 523, Selling Your Home.