CAPITAL GAIN/LOSS BASICS

CAPITAL GAIN/LOSS BASICS

You always hear about Capital Gain and taxes, but what is it actually, and what are the basics that are involved when you sell capital assets?

A "capital asset" is defined by Investopedia as "significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art. For a business, a capital asset is a type of asset with a useful life longer than a year that is not intended for sale in the regular course of business's operation". Items that fall under this definition often are associated with Capital Gain/Loss.

One big side note: Your home is a capital asset, but when you sell it, you MAY not have a capital gain if (1) it is your principle residence, (2) lived there at least two out of the last five years, (3) did not claim if for a business home-office, and your profit was less than $250,000 (or $500,000 if you are married and file jointly). This $250,000 exemption amount is ONLY for a main home, no other assets. If your profit was over this amount, it is taxable as a capital gain, but you can never claim a capital loss on a home residence.

Now back to non-home assets.

Gain or loss calculation: the gain or loss is calculated by taking the selling price and then subtracting the original purchase price and the cost of any improvements. This cost, plus improvements, is called your "Basis". So for a house or building, add to the purchase price any additions or improvements you did to the edifice.

Net Investment Income Tax may apply. Taxpayers must include all capital gains in their income. Capital gains may be subject to the Net Investment Income Tax if the taxpayer's income is above certain amounts (that explanation is beyond the scope of this abbreviated blog). The rate of this tax is 3.8 percent.

If you have sold the asset for a loss, you may deduct the amount of loss from your taxes. BUT you can only claim $3000 loss per tax year unless you have some gains on sales of other assets to offset it. Of course, any amount over the $3000 can be carried to the next tax year(s).

Long Term or Short Term gains or losses make a difference on taxes also. Long Term is any assets that you owned more than one year. Short Term is an asset owned less than one year. Long Term capital gains get preferential treatment tax-wise. Short term gains are taxed as ordinary income if sold by itself, meaning there are no offsets to use with capital gains. So if you are going to sell an asset, it is generally advisable, in most circumstances, to sell it after at least 365 days of ownership.

You may reduce your long term gain with long term losses to get to a NET long term capital gain. If you use short term losses to offset long term capital gains, you have a Net capital gain. Think about selling assets with capital losses to offset capital gains so the tax bite is reduced.


Tax on net capital gains is from 0% to 20%, but in certain situations could be 25% or 28%. Most individuals, though not all, fall in the 0%-15% range which is typically less than your regular income tax rate. So in many instances an individual with a 15% income tax rate will pay 0% on capital gains. A 20%-25% tax bracket income tax individual will generally figure a 15% tax on capital gains.

If you sell assets, you will put it on Schedule D, but often will use form 8949 to calculate what amount(s) need to go to the Schedule D. Those numbers will then transfer to your 1040 to calculate the amount of tax, if any, owed.

This is a quick summary of Capital Gains and Losses. It is NOT everything you need to know, rather, it is a brief overview of salient points. If you are uncertain, please talk to your tax profession BEFORE selling any asset especially if you are in the 20%+ tax brackets.

REFERENCES:
Investopedia. September 2, 2017. Capital Asset. Website. http://www.investopedia.com/terms/c/capitalasset.asp.

Internal Revenue Service. Capital Gains and Losses-10 Helpful Facts to Know.
IRS Tax Tips. Issue Number: IRS Tax Tip 2017-18. February 22, 2017.