A Guide to Taxation of Capital Gains and Losses

If you’ve come to our blog, you probably already know what capital gains are. For a refresher, or if you don’t know, here’s the official definition:

Capital gain is an increase in the value of a capital asset that gives it a higher worth than the purchase price. Gains are generally not taxable (and losses are not deducted) until the item sells. A capital asset can come in a variety of forms:

  • Inherited property
  • Property someone owns for personal use or as an investment
  • Investment property (stocks and bonds)
  • Collectibles such as artwork and coins

What Term Do You Use When a Capital Asset Sells?

When you sell a capital asset, the capital or loss is “realized.” This is the difference between the basis (what you paid for it) and the amount you receive when you sell the asset. (For more information, view IRS Publication 544IRS Publication 550 and IRS Publication 551.)

How Are Capital Gains Classified?

Capital gains are classified by the length of time the property is held. Capital gains can come in the form of short-term (have the asset for one year or less) or long-term (have the asset for more than a year or inherit the asset). Both types of capital gains are subject to income taxes.

What Should You Know About Capital Gains and Taxes?

So now that we’ve outlined some key definitions, there are many details involved with capital gains from a tax perspective. Here are the most important:

1 – Net Investment Income Tax: While you must report capital gains on your personal tax return, they are only subject to the 3.8% Net Investment Income Tax if your modified adjusted gross income is above $200,000 ($250,000 if married filing jointly; $125,000 if married filing separate).

2 – Deductible Losses: You can deduct capital losses on the sale of an investment property but not the sale of personal use property, such as your residence. If your capital losses exceed your gains, you can deduct the difference as a loss on your tax return (up to $3,000 per year, or $1,500 if married and filing separately). If your total net capital loss exceeds the deductible limit, you can carry it over to your next year tax return.

3 – Net Capital Gain: If your long-term capital gain exceeds your long-term loss, the difference between the two is a net long-term capital gain. If the net long-term capital gain is more than the net short-term capital loss, the taxpayer has a net capital gain. The net capital gain tax rate depends on your overall adjusted gross income (AGI)

  • Capital gain rates depend on the taxpayer’s marginal tax bracket.
    • Someone in the 10% tax bracket will have a 0% capital gain rate.
    • Someone in the 35% tax bracket (up to $418,400 in 2017; $470,700 married filing jointly) will have a 15% capital gain rate.
    • Someone in the 39.6% tax bracket will have a 20% capital gain rate. (Very few taxpayers have income in the top tax bracket.)
  • Certain types of net capital gain are taxed at 25 to 28%. It includes gain on the sale of collectibles (certain coins, art, antique vehicles, etc.) and gains attributable to un-recaptured depreciation on the sale of real estate. The cut-offs are $466,950 for married filing jointly, $441,000 for head of household, and $233,475 for married filing singly.

Get Help!

Do you have capital gains to report on this or next year’s tax return? Keep the above rules in mind as you plan for your personal and business taxes.

Don’t want to tackle taxes alone? Get help with your small business taxes from the team at Block Advisors.


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