What is a capital asset, and how much tax do you have to pay when you sell one at a profit? Find out how to report your capital gains and losses on your tax return with these tips from TurboTax.
What is a capital gain?
A capital gain is what the tax law calls the profit you receive when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares and real estate. This does not include your primary residence. Special rules apply to those sales.
What's the difference between a short-term and long-term capital gain?
There's a very big difference. The tax law divides capital gains into two different classes determined by the calendar.
- Short-term gains come from the sale of property owned one year or less and are taxed at your maximum tax rate, as high as 37% in 2021.
- Long-term gains come from the sale of property held more than one year and are taxed at either 0%, 15%, or 20% for 2021.
What is the holding period?
That's the period you own the property before you sell it. When figuring the holding period, the day you buy property does not count, but the day you sell it does.
So, if you bought a stock on April 15, 2020, your holding period began on April 16, 2019. Thus, April 15, 2021 would mark one year of ownership for tax purposes.
- If you sold on April 15, you would have a short-term gain or loss.
- A sale one day later on April 16 would produce long-term tax consequences, since you would have held the asset for more than one year.
How much do I have to pay?
The tax rate you pay in 2021 depends on whether your gain is short-term or long-term.
- Short-term profits are taxed at your maximum tax rate, just like your salary, up to 37% and could even be subject to the additional 3.8% Medicare surtax, depending on your income level.
- Long-term gains are treated much better. Long-term gains are taxed at 15% or 20% except for taxpayers in the 10% or 15% bracket. For low-bracket taxpayers, the long-term capital gains rate is 0%. There are exceptions, of course, since this is tax law.
- Long-term gains on collectibles—such as stamps, antiques and coins—are taxed at 28%, unless you're in the 10% or 15 % or 25% bracket, in which case the 10% or 15% rate or 25% rate applies
- Gains on real estate that are attributable to depreciation—since depreciation deductions reduce your cost basis, they also increase your profit dollar for dollar—are taxed at 25%, unless you're in the 10% or 15% bracket.
- Long-term gains from stock sales by children under age 19—under age 24 if they are students—may not qualify for the 0% rate because of the Kiddie Tax rules. (When these rules apply, the child’s gains may be taxed at the parents’ higher rates.)
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What is a capital loss?
A capital loss is a loss on the sale of a capital asset such as a stock, bond, mutual fund or real estate. As with capital gains, capital losses are divided by the calendar into short- and long-term losses.
Can I deduct my capital losses?
Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.
- If you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one).
- If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income.
- Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income.
- If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.
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