Understanding Capital Gains and Losses

How you manage the sale of your investments impacts your overall tax picture. And to get the most out of the current tax law, you'll need to understand capital gains and losses.

What's a Capital Asset?

Capital gains or losses are generated when you sell capital assets, which are generally any property you own. Your house, car, stocks, bonds, jewelry and collectibles are all capital assets.

Short or Long-Term?

There are two classifications of gains and losses, based on how long you owned the asset. Short term means you held the investment for one year or less, and long term applies to anything you owned for more than a year.

What's the Amount?

Generally, the amount of your gain or loss is the difference between how much you paid to purchase the asset and the amount you sold it for. Your basis in the asset also includes your costs to acquire it like sales tax, shipping and installation or set up fees. There are special rules for assets acquired by inheritance. You'll want to consult your tax professional if this applies to you.

What's The Tax?

The tax rate you'll pay depends on whether your gain is short or long term. Tax rates for short term gains are the same as what you owe on your ordinary income. Long term gains have lower preferential tax rates.

What's a Loss?

If you sell a capital asset for less than your basis, which is your total investment in it, you'll have a capital loss. You can generally offset these losses against gains of the same type (e.g., short term losses can offset short term gains). But only losses on the sale of financial investments are tax deductible.

Selling your home, car or other personal-use property for a loss won't trigger a tax deduction. And if your losses exceed your gains, you can offset up to $3,000 against other types of income (e.g., W-2 wages) each year and carry forward the rest to future years.

But beware of the wash sale rules. If you sell a security and buy it, or a substantially similar one, within 30 days, any loss you incurred isn't tax-deductible.