Tax on Capital Gains and Limits on Capital Losses

A capital asset is just about anything you own and use for personal or investment purposes. Typically, a capital asset is something that produces a benefit that extends beyond the current tax year. For example, all of the following are capital assets:

  • Your home
  • Household furnishings
  • Stocks or bonds held in your personal account
  • Coin or stamp collections
  • Gems and jewelry
  • Gold, silver or any other metal
  • Business property

Special tax rules apply when you sell a capital asset.

Capital Gains and Losses

When you sell a capital asset, the difference between the amount you sell it for and the amount you paid for it (called its basis) is either a capital gain or a capital loss. Technically, a "cost basis" is used to figure the gain. The cost basis is the original purchase price, adjusted up or down for various things, such as improvements or loss in value.

You have a capital gain if you sell the asset for more than the cost basis. You have a capital loss if you sell the asset for less than the cost basis.

You must keep accurate records that show your basis. Your records should show the purchase price, including commissions; increases to basis, such as the cost of improvements; and decreases to basis, such as depreciation, non-dividend distributions on stock and stock splits.

Long-Term or Short-Term

Capital gains and losses are classified as long-term or short-term. If you hold an 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 figure the holding period, begin counting on the day after you received the property and include the day you sold it.

Tax on Capital Gains

All capital gains are taxable and must be reported on your tax return. However, only capital losses on investment or business property are deductible. Losses on sales of personal property - like your car or home - are not deductible.

You're required to pay a tax on your net total of capital gains. Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss. Capital gains are generally taxed at a lower rate than ordinary income.

The tax rate on a net capital gain is generally 15 percent for 2010, but it could be higher or lower depending on your income level and the type of asset. For example:

  • For low income taxpayers, you may have no capital gains tax at all
  • Gains from the sales of qualified small business stock or collectibles (such as coins or art) may be taxed at 28 percent
  • Some sales of Section 1250 real property may be taxed at 25 percent

All capital gains tax rates may change for 2011.

Limitations on Capital Losses

Capital losses are deductible only against capital gains, plus an additional $3,000 ($1,500 if you're married filing separately). If your net or total capital loss is more than the limit, the excess can be carried forward to later years.

If the property you sold was personal rather than business or income-producing, the loss can't be deducted or used to offset your capital gains.

Reporting 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.

Keep in mind, if you have a taxable capital gain, you may be required to make estimated tax payments.

Questions for Your Attorney

  • What property is not considered a capital asset?
  • What's the basis of a capital asset I received as a gift? 
  • How do you carry capital losses forward?
Have a income tax question?
Get answers from local attorneys.
It's free and easy.
Ask a Lawyer

Get Professional Help

Find a Income Tax lawyer
Practice Area:
Zip Code:
How It Works
  1. Briefly tell us about your case
  2. Provide your contact information
  3. Connect with local attorneys

Talk to an attorney

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you